Comment by dh2022
15 hours ago
Would you mind posting a link where Trump wanted to allow prepayment penalties? This sounds unbelievable.
Every home owner in the US would be against it (especially the ones who got their mortgages in the past two years at relatively high interest rates).
Crap, I was wrong. Bill Ackman is trying to convince Bessent to do it. So while it may happen, it isn’t coming from inside the admin.
One argument is that it could allow for lower rates, BTW. (This is true, it very well could).
And also, if it happened it would be for newly issued mortgages. Existing mortgages have language in the contract that you couldn’t just unilaterally change
How would prepayment penalties lower interest rates ? I really do not see how.
The same way callable bonds command a higher interest rate than non-callable do. If the bond holder can just decide that tomorrow it’s cheaper for them to pay off the bond vs pay me the coupon on it, it’s worth less to me as a buyer. I lose if interest rates go lower (bond is paid early) or higher (I am now holding a bond worth less than a newly issued one).
If you look through the bond market you will sometimes see bonds issued by the same company or agency both as callable and non-callable, the callable bonds are usually .5-1% lower even when issued on the same date.
Your lender definitely wants to get paid back, but they don’t necessarily want to get paid back right now. Because then they have a pile of money and they need to find something to do with it.
Consumers have a tendency to pay loans back early when the bank doesn’t have any more profitable alternatives. Consumers also have a tendency to NOT pay loans back early when the bank does have more profitable alternatives.
But you know that the first situation is worse for the bank than the second situation. So they do account for this, to a degree, when they give you a loan. In theory they would be willing to give you a lower interest rate if you gave up your prepayment option. In theory. In reality? Who knows.
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