option risk

option risk

All American consumer mortgage loans give the borrower the option to pay the loan off early, usually because of a sale of the property or because the borrower decided to refinance. This is bad news for the investors who purchased that mortgage as part of a pool, because now the income stream they intended to purchase has ended. The investor's risk, that the prepayment option may be exercised and the income stopped, is called the option risk and sometimes the prepayment risk.