Prepayment burnout
Asset-Backed Securities glossary · Asset Backed Securities
Definition
The phenomenon where a pool's faster-prepaying borrowers refinance early, leaving a slower-prepaying residual population; future prepayments slow even at unchanged rates.
Prepayment burnout in plain English
Picture a big pool of mortgages. When interest rates drop, the savviest, most eager borrowers rush to refinance (swap their loan for a cheaper one), which pays off their old loan early. Once those quick-movers have left, the borrowers still remaining are the ones who — for whatever reason — just don't refinance easily. That's burnout: even if rates stay low and tempting, prepayments slow down because the 'easy' refinancers are already gone, and only the sluggish crowd is left. It's like a store's flash sale where the deal-hunters grab everything first, and later shoppers barely react to the same discount.
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