what is Single Monthly Mortality

Single Monthly Mortality (SMM) is a measure of the prepayment rate of mortgage-backed securities (MBS), expressed as a percentage of the principal balance at the start of a month. It represents the portion of principal payments that occur in a single month beyond the scheduled principal repayments. Investors in MBS are concerned with SMM because prepayment reduces the future interest income they would otherwise receive. Here's a detailed analysis of SMM and its implications:

1. **Understanding SMM**: SMM is calculated by dividing the unscheduled principal payments (actual principal paid less the scheduled principal) by the scheduled balance at the end of the month. It is an indicator of the prepayment activity within a mortgage pool.
2. **Impact on Investors**: A higher SMM indicates greater prepayment risk, which can negatively impact investors by reducing the potential future interest income. Conversely, a lower SMM suggests a lower prepayment risk and potentially higher returns due to a longer interest stream.
3. **Relationship with CPR**: The Conditional Prepayment Rate (CPR) is an annualized figure that reflects the probability of prepayment over the entire life of the mortgage pool. SMM, being a monthly measure, is used to calculate CPR. CPR is influenced by historical prepayment rates, economic conditions, and the economic environment.
4. **Calculating SMM to CPR**: To calculate CPR from SMM, you first determine the SMM for a given month, then annualize it. The annualized SMM becomes the CPR, which provides a measure of the expected prepayment activity over the entire year.
5. **Investment Strategy**: Investors use SMM and CPR to gauge the risk and potential returns of their investments in MBS. A lower SMM and CPR suggest a more favorable investment environment with a lower likelihood of prepayment and potentially higher interest income.

In conclusion, Single Monthly Mortality is a critical metric for investors in mortgage-backed securities, providing insights into the prepayment risk and potential returns of their investments. By understanding and monitoring SMM and CPR, investors can make informed decisions about their investment strategies.