conduit financing

conduit financing

A method of providing loan money through a debt instrument that blends features of a traditional pass-through mortgage security and a bond.Traded on Wall Street as securities known as REMICs—real estate mortgage investment conduits.For real estate borrowers, the single most important feature of conduit financing is the very large prepayment penalty imposed on all such transactions.The success of the entire securitization process depends upon trustee receipt of regular monthly income for distribution to bondholders according to a prearranged schedule. If a borrower pays off the loan early,that loan will no longer earn any interest,which affects the money available for payment to investors. In order to compensate, the trustee will have to go out into the marketplace and purchase an investment to replace the mortgage paid off. That investment may cost a premium price,so the prepayment penalty is used to offset the premium.