What is Conditional Prepayment Rate (CPR)?
Conditional Prepayment Rate (CPR) measures the annualized percentage of a loan pool's outstanding principal balance that is expected to be prepaid, through refinancing, home sale, or payoff, in a given period. It is "conditional" because it represents the rate given that the loan has survived to that point (i.e., not already defaulted or paid off). CPR is the primary metric for modeling prepayment risk in whole loan analytics. Higher CPR means faster principal return, shorter WAL, and less interest income over the life of the loan.
Formula
CPR = 1 - (1 - SMM)^12 Where SMM (Single Monthly Mortality) is the monthly prepayment rate SMM = Prepayments / Beginning Balance
How LoanBook Uses Conditional Prepayment Rate
LoanBook uses its proprietary Prepay Model: a residential refinance S-curve (Richard & Roll methodology) with two-population burnout (Schwartz & Torous) and a separate turnover channel, consumer speeds by loan type, an ABS methodology for auto loans, a payoff-date model for fixed-rate commercial real estate, SBA calibrations for government-guaranteed loans, and a flat curtailment speed for leases.
Frequently Asked Questions
What drives prepayment rates?
The primary driver is the "refinance incentive", the difference between the borrower's current note rate and prevailing market rates. When rates drop, CPR rises as borrowers refinance. Other factors include loan age (seasoning), FICO score, LTV, geography, and seasonality.
What is a typical CPR for whole loans?
CPR varies widely by asset class and rate environment. Residential mortgages typically range from 5-25% CPR. Auto loans run 10-30%. SBA 7(a) loans average 8-15%. Commercial loans with lockout periods can be near 0% in early years.
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