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"It's a bit of an unknown, but for example, [with loans] we'll try and restrict the pre-payment risk. We can also constrain the ratings, the term of loans, and some of the conditions.
Why do people care about pre-payment risk? On the simplest level, slow pre-payments mean that the investor does not get his money back as quickly, and the value of the bond declines.
However, the average spread after correcting for the pre-payment risk or the OAS should remain very stable.
Here, the risk on the loan has been parceled out into interest-rate risk, assumed by the borrower; credit risk, assumed by the government; and pre-payment risk, assumed by the investor.
It raises a variety of risks which change over time and are notoriously difficult to manage, including credit, interest rate and market risk and mortgage pre-payment risks. The welfare consequences of these risks are particularly important because house buying is usually the largest financial transaction households make, and the cost of housing means that they cannot usually hedge their exposures to these risks.