With the AFT model, clients can approach the calculation of prepayments to most accurately reflect projected behavior.

There are four sources of prepayments:

• U.S. home sales activity
• Borrower refinancing activity
• Principal curtailment
• Loan Default

Home Sales Activity – As a subset of overall housing market conditions, the total housing turnover related prepayments are modeled. Factors incorporated:

1. Rate of existing U.S. housing sales
2. Current mortgage rates
3. Borrower points (higher up-front costs lead to less prepayment activity)
4. Mortgage age
5. Seasonality (a borrower is significantly more likely to move in the summer)
6. Type of loan

Borrower Refinancing Activity – AFT researches and models the underlying factors that motivate a borrower to refinance. A keen understanding of borrower behavior under varying economic conditions allows AFT to accurately project future borrower refinancing activity.

A year after origination, for example, high premium-originated collateral tends to be more sluggish in response to refi incentives versus current coupon-originated collateral simply because there was usually a reason for the high premium origination.

Borrower refinancing activity factors incorporated in AFT's model include:

1. Spread – spread between the current market rates and loan note rates.
2. Burnout factor – AFT models burnout by assuming the pool is not homogeneous, but consists of several sub-pools with different propensities to refinance. As faster pools deplete, slower mortgages begin to dominate the composition. Not only the overall refinancing speed decreases, but the entire structure of response to refinancing incentive changes as well. In the real world a loan that has been exposed to a 150bp opportunity will not refinance for 100bps, but will very much come to life for a 250bp opportunity.
3. Degree of publicity – When market mortgage rates reach historic lows, the resulting publicity motivates otherwise complacent borrowers to take advantage of the refinance opportunity. Pools that were considered burnt-out begin to refinance again, and overall responsiveness is heightened.
4. Loan age
5. Seasonality
6. Pools with mortgages whose coupons are much higher than prevailing mortgage rates at the time of origination – this often decreases the refinancing activity as "normal" loans.

Principal Curtailment – Borrowers can send extra payments to reduce their principal balance. Curtailments are not a significant contributor to prepayments (typically less than .25 CPR).

Default – Applied Financial Technology employs industry standard default curves to determine the effect of defaults. Default is, in effect, a form of prepayment and is fully incorporated in the AFT model.