Burnout

DEFINITION of 'Burnout'

A period of slowing mortgage prepayment within a mortgage backed security (MBS). This usually occurs after the mortgages start to mature. When some percentage of the underlying loans fail to prepay after an interest rate cycle, this is known as burnout. Those borrowers who did not refinance during the first interest rate cycle are less like to do so if interest rates drop again.


BREAKING DOWN 'Burnout'

The rate at which the underlying loans of an MBS prepay is largely a function of current interest rates relative to the interest rates on the underlying loans. If current interest rates fall to a certain point below the interest rate on an existing mortgage, borrowers have an incentive to refinance. An MBS can go through several cycles of interest rates over its term. Prepayment risk is a substantial risk for investors in MBSs and investors look for MBSs with burnout because burnout lessens the prepayment risks.

RELATED TERMS
  1. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  2. Refinancing Risk

    1. The risk that an early unscheduled repayment of principal ...
  3. Prepayment Model

    A model used to estimate the level of prepayments on a loan portfolio ...
  4. Prepayment

    The satisfaction of a debt or installment payment before its ...
  5. Contraction Risk

    The risk faced by the holder of a fixed income security when ...
  6. Prepayment Penalty

    A clause in a mortgage contract that says if the mortgage is ...
Related Articles
  1. Professionals

    Mortgage-Backed Securities (MBS)

    CFA Level 1 - Mortgage-Backed Securities (MBS). Learn the process of creating and collateralizing mortgage-backed securities. Covers their expected cash flows and possible risks.
  2. Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  3. Options & Futures

    20 Investments: Mortgage-Backed Securities

    What Is it? A mortgage-backed security (MBS), also known as a "mortgage pass-through" or a "pass-through certificate", is an investment instrument that represents ownership of an undivided interest ...
  4. Insurance

    Behind The Scenes Of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  5. Bonds & Fixed Income

    Introduction To Asset-Backed And Mortgage-Backed Securities

    In this article, we will go through the structure, along with some examples of ABS and valuation.
  6. Options & Futures

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  7. Professionals

    Call and Prepayment Risk

    CFA Level 1 - Call and Prepayment Risk. Learn the sources of call and prepayment risk and why it can occur. Highlights the disadvantages of investing in prepayable or callable bonds.
  8. Professionals

    Mortgage-Backed Securities

    Mortgage-Backed Securities
  9. Investing

    3 Major Risks For Annaly’s Investors

    Thanks to its double-digit dividend yield, Annaly Capital Management has long been a favorite among income-seeking investors.
  10. Should You Pay Down Your Mortgage Early?

    At some point, you’ve probably heard the common wisdom that you should head into retirement without a mortgage to worry about. But the reality is that 40% of individuals who are between ...
RELATED FAQS
  1. Why do MBS (mortgage-backed securities) still exist if they created so much trouble ...

    Read several different arguments in favor of allowing the trade of mortgage-backed securities, even after the financial crisis ... Read Answer >>
  2. Do FHA loans have prepayment penalties?

    Learn whether FHA loans have prepayment penalties, and find out the rules governing interest charges when prepaying your ... Read Answer >>
  3. Do prepayments provide working capital?

    Learn how prepayments for various services such as insurance, rent and supplies are included as part of a company's current ... Read Answer >>
  4. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  5. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Answer >>
  6. What are the best ways to invest in mortgage-backed securities (MBS)?

    Find out how you can start investing in real estate through mortgage-backed securities. Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center