PT - JOURNAL ARTICLE AU - Alexander Levin TI - Active-Passive Decomposition in Burnout Modeling AID - 10.3905/jfi.2001.319281 DP - 2001 Mar 31 TA - The Journal of Fixed Income PG - 27--40 VI - 10 IP - 4 4099 - https://pm-research.com/content/10/4/27.short 4100 - https://pm-research.com/content/10/4/27.full AB - To model the effect of mortgage prepayment burnout, the author decomposes mortgage pools into active (potentially refinancing) and passive (prepaying at a turnover speed) components. This two-component model is not only powerful enough to replicate the burnout effect, but also perfectly tractable for a much wider range of mortgage valuation and modeling problems than once thought. Once parameters of the model are known at origination, one can reconstruct the current burnout stage using only the age and the observed pool factor, without retroactive analysis of past prepayment incentives. Or, assuming no change in interest rates, one can compute the average life and the life speeds for the entire mortgage pool, and therefore fit the broker forecasts. Unlike the mortgage pool itself, the two modeled components are path-independent for unstructured fixed-rate mortgage pass-throughs, which facilitates time-efficient pricing methods and avoids Monte-Carlo simulations.