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Steady state is a phase in the mortgage industry where borrowers overpay their mortgages to prepare for refinancing, making the yield on mortgage-backed securities more predictable. MBS pools are purchased by banks and bundled into securities for investors, but economic changes and risky subprime mortgages can make them pernicious. A steady-state economy is an economic theory that suggests adopting an economy designed to sustain itself efficiently.
In the mortgage industry, steady state is a stage of development in a pool of mortgage-backed securities (MBS). When interest rates fall, borrowers often begin to overpay the principal on their mortgages to lower their balances in preparation for the refinance. A mortgage enters a steady state after interest rates reach a point that encourages borrowers to refinance, when the overpayment amount becomes stable, making the final yield on the security’s financial returns more predictable. Steady state can be used to describe a stable economic state with no significant recession or growth fluctuations.
An MBS pool is a mortgage-backed security that has been purchased by banks and bundled into securities for investors. These types of investment pools usually include residential real estate, but occasionally commercial real estate mortgages are also pooled into securities. After investing in the pool, an MBS pool owner collects the interest and principal of the mortgages in the package. While an MBS pool can mean steady and predictable income, economic changes and risky subprime mortgage packages can make some MBS pool investments pernicious. Usually, MBS pools are issued by government-affiliated organizations that ensure investors receive timely payment of their investment returns.
When a mortgage pool reaches the steady state phase, the payments become static and the owner of the MBS can more accurately predict how much the change in interest rates will affect its return. The amount of interest return that an investor receives is called the yield. If a borrower starts paying extra on a mortgage to reduce the balance, the MBS pool owner will experience a reduced return because they make less interest on the mortgage. When a borrower makes extra payments on a mortgage, it is referred to as a “reduction” if they pay more than the required monthly balance and an “upfront” if they pay the entire mortgage balance.
A steady-state economy is an economic theory that suggests adopting an economy designed to sustain itself efficiently. This type of economic theory is in contrast to the more common theories which state that economic prosperity is based on growth. Steady-state economics proponents believe that ecosystems have limited resources, so the most efficient way to use resources is to distribute them evenly. Opponents of a steady-state economy argue that suspending growth will make poor parts of the world permanently poor.
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