What is the S-curve for prepayments? Explain the reason for the shape

What will be an ideal response?

The S-curve for prepayment is a graph where values for the "CPR%" are given along the vertical line and values for the "WAC/Mortgage Rate" ratio are found along the horizontal axis.

The reason for the observed S-curve for prepayments is that as the rate ratio increases, the CPR (i.e., prepayment rate) increases. There is some level of the rate ratio, however, at which the prepayment rate tends to level off. The reason for this leveling of the prepayment rate is because the only borrowers remaining in the pool are those that cannot obtain refinancing or those who have other reasons why refinancing does not make sense.

The S-curve is not sufficient for modeling the refinancing rate/term refinancing. This is because the S-curve fails to adequately account for two dynamics of borrower attributes that impact refinancing decisions: (1) the burnout effect and the threshold media effect.