Portfolio Runoff

DEFINITION of 'Portfolio Runoff'

A decrease in the assets of a mortgage-backed securities portfolio due to the prepayment of the securities held in that portfolio. It is risk these portfolios face, which can lead to pre-payment risk and that usually forces the fund to reinvest the proceeds at lower yields than where the original securities were purchased.

BREAKING DOWN 'Portfolio Runoff'

Most mortgage-backed securities have an embedded call option held by the borrowers of the underlying mortgages backing those securities. When interest rates fall or home values rise, an incentive is created for homeowners to refinance their mortgage, which leads to portfolio runoff for the investors in those mortgages.

RELATED TERMS
  1. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  2. Dealer-Median Prepayment Speed

    The median value of all Wall Street securities dealers' prepayment ...
  3. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  4. Prepayment Model

    A model used to estimate the level of prepayments on a loan portfolio ...
  5. Contraction Risk

    The risk faced by the holder of a fixed income security when ...
  6. Residential Mortgage-Backed Security ...

    A type of security whose cash flows come from residential debt ...
Related Articles
  1. Credit & Loans

    How To Become a Mortgage-Backed Securities Analyst

    Specializing in structured or derivative credit products like mortgage-backed securities requires education and prior experience in the mortgage field.
  2. Professionals

    The Workings Of Equity Portfolio Management

    Achieve analytical efficiency by applying your evaluation to a key set of stocks.
  3. Credit & Loans

    Credit Crisis: What Caused The Crisis?

    By Brian PerryIn this chapter, we'll examine the causes of the credit crisis, starting with the decline in the housing market that eventually led to increased levels of mortgage defaults. These ...
  4. Mutual Funds & ETFs

    The ABCs of Mortgage-Backed Securities ETFs

    ETFs focused on mortgage-backed securities, or MBS, offer an opportunity to further diversify the fixed-income portion of your portfolio.
  5. Stock Analysis

    American Capital Agency Is in a Bind (AGNC)

    American Capital Agency (NASDAQ: AGNC) is stuck between a rock and a hard place when it comes to interest rates: It loses if they go up, and it loses if they go down. Take these figures from ...
  6. Term

    What's the Option-Adjusted Spread?

    The option-adjusted spread, or OAS, measures a fixed-income security rate’s spread and the risk-free rate of return that’s adjusted to account for an embedded option.
  7. Term

    Understanding Portfolio Investment

    Portfolio investment involves buying securities with the expectation of earning a return on them.
  8. 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 ...
  9. Fundamental Analysis

    Understanding Modern Portfolio Theory

    Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the owner’s risk tolerance.
  10. Mutual Funds & ETFs

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
RELATED FAQS
  1. 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 >>
  2. The BEST definition of a benchmark portfolio is:

    The BEST definition of a benchmark portfolio is: a) A preset list of securities to be used to compare the performance of ... Read Answer >>
  3. How can I calculate the expected return of my portfolio?

    Understand the components of the equation used to calculate the expected return of an investor's portfolio. Learn why the ... Read Answer >>
  4. 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 >>
  5. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Learn about the difference between the Z-spread and option-adjusted spread valuations of future cash flows for bonds, and ... Read Answer >>
  6. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center