Why is the distinction between a voluntary and involuntary prepayment important in nonagency RMBS?
What will be an ideal response?
In nonagency RMBS, two prepayments rates are projected: voluntary prepayment rate and involuntary prepayment rate. The voluntary prepayment rate (VPR) is calculated similarly to a conditional prepayment rate (CPR). First a voluntary monthly mortgage rate, VMM, similar to the single monthly mortality rate (SMM) described in Chapter 11, is calculated. That monthly rate is then annualized to get the VPR. Involuntary prepayment rates are quoted like the conditional default rate (CDR), which is the annualized value of the unpaid principal balance of newly defaulted loans over the course of a month as a percentage of the unpaid balance of the pool (before scheduled principal payment) at the beginning of the month. The SMM for a month for a deal is the sum of the VMM and MDR for that month.
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