In the case of MBS the bank acts as an intermediary between an investor and a mortgager. |
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But now, how much is going to be paid off to the second mortgager? |
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That is a risk of early redemption which usually occurs when the interest rates are falling down creating refinancing possibilities for the mortgager with lower interest rates. |
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The mortgager and mortgagee differ the one from the other, not more in length of purse, than the jester and jestee do in that of memory. |
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Thus, a mortgage effectively is composed of a long-term non-callable bond plus an embedded call option that gives the mortgager the right to buy back the bond at par. |
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And the mortgager must stay in residence while the lodger's there. |
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