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Is the prepayment risk really much different from a callable commercial bond? Call protection is not universal in commercial or even agency bonds.
by betterunix2 5y ago
Is the prepayment risk really much different from a callable commercial bond? Call protection is not universal in commercial or even agency bonds.
- deleted 5y ago[deleted]
- dtnewman 5y agoNo, not very different. But as I understand it, most commercial bonds are not callable, whereas most mortgages are pre-payable with no penalty.
- lotsofpulp 5y agoDoes the prepayment risk even matter for most mortgages in the US since they are sold to the government sponsored enterprises? https://en.wikipedia.org/wiki/Government-sponsored_enterprise https://en.wikipedia.org/wiki/Government-sponsored_enterpris... As I understand, the goal of those entities is to simply lower the costs and increase access to loans to the US public.
- chadash 5y agoYes. Fannie and Freddie sell those loans to investors, they don't hold them. They just insure them against defaults. But prepayments are still investors' problems as far as I'm aware.
- patrickthebold 5y agoThe Gses bundle up the mortgages and sell mortgage backed securities to investors. The prepayment risk flows through to those investors. As an extreme example, some securities they separately sell the principle payments and the interest payments. So if you bought the interest payments on a bunch of mortgages you stop getting paid as people prepay. The folks who bought the principle payments are very happy to get paid early.