History 1977 at Salomon Bros see Liar’s Poker by Michael Lewis basic structure: pass-through
Prepayment Risk Homeowners have a call option. They will exercise the option when interest rates are low. If interest rates are low, the bank (or owner of the MBS) will have to reinvest the proceeds at a lower rate of interest. If interest rates are high, rates of prepayment decline and the bank (or owner of the MBS) don’t have the opportunity to reinvest at the higher rates.