If a CMO has a PSA of 150, what event most likely has occurred?

A CMO, or Collateralized Mortgage Obligation, is a type of mortgage-backed security that is structured to provide different tranches with varying risk and return profiles. When a CMO has a PSA (Prepayment Speed Assumption) of 150, it indicates that the prepayment rate of the underlying mortgages is faster than the baseline established by the PSA model, which is typically set to 100.

A PSA of 150 suggests that borrowers are refinancing or paying off their mortgages more quickly than average. This often occurs when interest rates have decreased, as lower rates encourage homeowners to refinance their mortgages to secure more favorable terms. When interest rates drop, it becomes economically advantageous for borrowers to pay off their existing higher-rate loans and refinance at lower rates, increasing the prepayment speeds.

Therefore, the scenario described—a CMO with a PSA of 150—strongly indicates that interest rates have decreased, leading to increased prepayment activity in the mortgage market. This understanding of the relationship between interest rates and mortgage prepayments is crucial for interpreting the implications of the PSA metric in CMO securities.