Burnout

AAA

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.


INVESTOPEDIA EXPLAINS '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. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  2. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  3. Prepayment

    The satisfaction of a debt or installment payment before its ...
  4. Pool Factor

    The percentage of the original principal that is left to be distributed ...
  5. Treasury Direct

    The online market where investors can purchase federal government ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt ...
Related Articles
  1. Profit From Mortgage Debt With MBS
    Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

  2. What is a Ginnie Mae security?
    Retirement

    What is a Ginnie Mae security?

  3. What You Need To Know About Preferred ...
    Trading Strategies

    What You Need To Know About Preferred ...

  4. Understanding The Bond Behemoth That ...
    Mutual Funds & ETFs

    Understanding The Bond Behemoth That ...

comments powered by Disqus
Hot Definitions
  1. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  2. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  3. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  4. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  5. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
  6. Direct Participation Program - DPP

    A business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. ...
Trading Center