Comments on: Prepaying mortgages

By: SEO

SEO — Wed, 11 Nov 2009 15:07:44 +0000

I am in no position to repay my mortgage, but if l was l would not want to be penalized for it

By: Baydonhill Mortgages

Baydonhill Mortgages — Wed, 11 Nov 2009 15:06:08 +0000

Is anyone now in a position to repay there mortgage

By: jonathan

jonathan — Mon, 28 Sep 2009 16:44:29 +0000

In commercial mortgages, prepayment takes the form of “yield maintenance,” which is a more direct statement of the real intent: that the loan is a stream of income. The problem is that model is now old-fashioned – with loans bundled, cut up, sold off (sometimes without being bundled) – but the requirements remain. Why? Because they go into the pricing, which means profit.

This is an example of how the financial institutions talk about efficiency but use their market power to maintain inefficiencies for the consumers which allow the financial institutions to make more money.

By: q

Mon, 28 Sep 2009 01:32:08 +0000

konzcal goes on to say things like charging for prepayment will increase the amount of fees people pay on balance? huh? is he saying that people will pay refinance more if they are charged to do so?

By: Frank

Frank — Sun, 27 Sep 2009 23:52:33 +0000

How about don’t buy anything if you can’t afford it? Novel idea in the U.S.,but it works every time. If you don’t have the actual cash on hand, don’t buy a house, and you don’t have to worry about anything. The inflated ego of the country in “home ownership” is actually quite amusing. You can go through life just fine without owning a home; and by the way you can accumulate more cash for retirement as well.

By: q

Sun, 27 Sep 2009 23:43:07 +0000

unfortunately, konczal’s argument with respect to banning mortgage prepayment fees is completely off the wall wrong.

he makes an odd leap: having a fee for prepayment implies that the bank is taking house price risk.

this was true in exactly one context: subprime mortgages that were meant to be refinanced. it was in fact a provision meant to screw the subprime mortgage holder.

but prepayment fees outside of that context — what’s wrong with them? as a mortgage holder, it might be possible for me to get a better rate by giving up that option.

By: Bill Coppedge

Bill Coppedge — Sun, 27 Sep 2009 22:44:14 +0000

Mortgages and mortgage backed securities would have a hard time trading higher than par (100) as efficient refinance removes all upside. Investors now have an option of inefficent refinance enhancing their return.

The amount mortgage rates sould have to rise to compensate investors is a good question. There is no free lunch.

Also the few remaining prepayment modelers at street firms might find themselves in the predicament of buggy whip makers.

By: RogerS

RogerS — Sun, 27 Sep 2009 22:21:12 +0000

Why do you need an asymmetric provision like this, which sounds like something from a populist politician. If you want a right to prepay at any time without penalty, why not encourage a plain vanilla floating rate mortgage with such a provision? Your version just forces opaque pricing, which I thought you wanted to avoid.

Where I would agree is that penalties for prepayment on a fixed rate mortgage should be on a transparent formula which should be symmetric with the discount for prepayment when market rates increase. And it might be reasonable to provide that the penalty should not allow any profit for the future years of the mortgage.

By: jck

jck — Sun, 27 Sep 2009 18:27:01 +0000

Prepayment is an option, if you don’t pay it on exercise via the ill-named “penalties”, it will be embedded in the spread. One thing for sure, prepayment won’t be free E.V.E.R. in normal times it is a bigger risk for investors than default as that has to be paid for.