Converting ABS to SMM

An ABS prepayment speed defines a vector of monthly prepayment speeds that result in the same constant dollar amount of prepayments. For example, given a pool of brand new loans, 2% ABS means that each month 2% of the loans originally in the pool will prepay.

If the loans are seasoned, however, the interpretation is not as simple. You need to use the following formula to directly convert the ABS prepayment speed to a Single Monthly Mortality (SMM) prepayment percentage:

SMM = ABS/[1-ABS*(seasoning-1)]

Click here to view an Excel chart showing the relationship between ABS and SMM for various ABS speeds.