Correct answer: C. $1,249,172

Step 1: Compute monthly interest

The mortgage pool balance is $900 million and the WAC is 6.60%.

Monthly interest rate:

$$\frac{6.60\%}{12} = 0.55\%$$

Monthly interest:

$$900{,}000{,}000 \times 0.0055 = 4.95\text{ million}$$

Step 2: Compute scheduled principal

Total mortgage payment is $5.748 million.

Scheduled principal:

$$5.748 - 4.95 = 0.798\text{ million}$$

So scheduled principal is about $797,929.

Step 3: Compute expected prepayment at 300% PSA

For month 1, standard PSA CPR is 0.2% annualized.

At 300% PSA:

$$CPR = 3 \times 0.2\% = 0.6\%$$

Convert CPR to SMM:

$$SMM = 1 - (1 - CPR)^{1/12}$$

This gives a small monthly prepayment rate, and applying it to the remaining balance after scheduled principal produces an expected prepayment of about $451,243.

Step 4: Total principal reduction

$$797{,}929 + 451{,}243 = 1{,}249{,}172$$

Thus the reduction in principal balance is $1,249,172.