Why was the PSA Standard Default curve introduced?
What will be an ideal response?
A standardized benchmark for default rates was formulated by the Public Securities Association (PSA). The PSA standard default assumption (SDA) benchmark gives the annual default rate for a mortgage pool as a function of the seasoning of the mortgages. As with the PSA prepayment benchmark, multiples of the benchmark are found by multiplying the default rate by the assumed multiple. Prepayments are measured in terms of the conditional prepayment rate (CPR). Borrower characteristics and the seasoning process must be kept in mind when trying to assess prepayments for a particular deal. In the prospectus of an offering, a base-case prepayment assumption is made—the initial speed and the amount of time until the collateral is expected to be seasoned. Thus, the prepayment benchmark is issuer specific. The benchmark speed in the prospectus is called the prospectus prepayment curve (PPC). Slower or faster prepayment speeds are a multiple of the PPC.
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