3 ms·
Prepayment seems like a pretty straightforward way to reduce risk. It feels like this article starts by claiming that prepayment adds unnecessary complexity to
by lukeschlather 11y ago
Prepayment seems like a pretty straightforward way to reduce risk. It feels like this article starts by claiming that prepayment adds unnecessary complexity to loans, moves on to show that default happens for precisely the reasons you would expect, and then says that we need to do more research on prepayment without really suggesting why prepayment might be a problem here.
- bradleyjg 11y agoPrepayment is a problem for the lender, not the borrower. Instead of just having to account for default risk, you also need to worry about the borrower repaying early. While that doesn't seem like it a big deal, it can be. If the bank expects to get twenty five more years worth of interest payments at 5%, the prevailing rate has now fallen to 3%, and you pay off the loan early, it has lost a lot of income it was expecting. In many other countries fixed rate mortgages typically contain a prepayment penalty to compensate banks for this risk, but US mortgages almost never contain such provisions.