<p>Depends on the structure.</p>
<ul>
<li>In the US, most residential MBS are pass-through, so the MBS is prepaid.</li>
<li>In Canada, MBS are (or at least were) mostly packaged into non-passthrough structures, so MBS cash flows follow fixed coupon schedule. There are prepayment penalties which are used to absorb the cash flows.</li>
<li>My understanding is that European pfandebriefe markets use a collateral pool, which absorbs prepayments.</li>
</ul>

CC BY-SA 4.0
2021-02-14T18:04:49.257Z
What is a logical reason(s) behind placing a penalty for pre-closure on the borrower? I can only see a greed-fuelled motive from the perspective of the investment bank, so as to keep a mortgage alive for ultimately being able to put it into an MBS.
Akshay Prabhakant
CC BY-SA 4.0
2021-02-14T19:27:56.283Z
If banks absorb prepayment risk, it is extremely difficult for them to duration match their portfolio. The lack of duration matching was a severe issue for banking systems in the 1970s. The US MBS market is somewhat unique in that the bond market absorbs prepayment risk.
Brian Romanchuk
CC BY-SA 4.0
2021-02-14T20:05:33.037Z
And the Danish system is amazingly straightforward— borrowers can buy their own loan back out at the current market price.
dismalscience
CC BY-SA 4.0
2021-02-14T13:53:13.083Z
2021-02-14T13:53:13.083Z
Brian Romanchuk
<p>What would happen to an MBS (mortgage-backed security) if hypothetically speaking all the underlying mortgages were fully paid back by the mortgagees (borrowers), much before the maturity date?</p>
<p>I request the repliers of this question to follow this pattern:</p>
<ul>
<li>If the answer is w.r.t. a global context, please start it with &quot;In a
global context...&quot; .</li>
<li>If the answer is w.r.t. only a country(XYZ)'s
context, please start it with &quot;In XYZ , ....&quot;.</li>
</ul>
<p>Thank you in advance!!!</p>

<macroeconomics><banking><investment><debt><securities>
What happens to an MBS if all the underlying mortgages are fully paid back by the borrowers much before the maturity date?
Akshay Prabhakant
# What happens to an MBS if all the underlying mortgages are fully paid back by the borrowers much before the maturity date?

(Asked by: username_0 on 2021-02-14)

What would happen to an MBS (mortgage-backed security) if hypothetically speaking all the underlying mortgages were fully paid back by the mortgagees (borrowers), much before the maturity date?

I request the repliers of this question to follow this pattern:

* If the answer is w.r.t. a global context, please start it with "In a
  global context..." .
* If the answer is w.r.t. only a country(XYZ)'s
  context, please start it with "In XYZ , ....".

Thank you in advance!!!

**Tags:** macroeconomics, banking, investment, debt, securities


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## 1 answers

### Answer by username_1 on 2021-02-14. Score: 2 | Accepted answer

Depends on the structure.

* In the US, most residential MBS are pass-through, so the MBS is prepaid.
* In Canada, MBS are (or at least were) mostly packaged into non-passthrough structures, so MBS cash flows follow fixed coupon schedule. There are prepayment penalties which are used to absorb the cash flows.
* My understanding is that European pfandebriefe markets use a collateral pool, which absorbs prepayments.

> **Comments:**
> **username_0**: What is a logical reason(s) behind placing a penalty for pre-closure on the borrower? I can only see a greed-fuelled motive from the perspective of the investment bank, so as to keep a mortgage alive for ultimately being able to put it into an MBS.  
> **username_1**: If banks absorb prepayment risk, it is extremely difficult for them to duration match their portfolio. The lack of duration matching was a severe issue for banking systems in the 1970s. The US MBS market is somewhat unique in that the bond market absorbs prepayment risk.  
> **username_2**: And the Danish system is amazingly straightforward— borrowers can buy their own loan back out at the current market price.  

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