35. Follow the Mortgage
Before the late 1970s, most mortgages were the property—and responsibility—of the banks and Saving and Loans issuing them. This meant the banks had the strictest underwriting standards and were extremely careful about to whom they loaned money. The banks still faced dangers caused by homeowners’ behavior, even solvent homeowners. The major risk was the possibility people might prepay their mortgage ahead of time; when interest rates fall, borrowers refinance their mortgage and pay up early. Although this seems like a bizarre and minor worry in light of today’s risks of defaults and foreclosures, prepayment actually causes huge problems for banks. A bank may have thought it had a high-yielding loan, but prepayment ends ...
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