The "Rent-To-Own" mortgage and prepayment risk

The most important risk factor in the mortgage and mortgage-backed security market has been prepayment risk. Various innovations have arisen to deal with it but none hedge it fully. The "Rent-To-Own" (RTO) mortgage discussed here is a mortgage instrument that reduces or even reverses prepayment risk. It does so by creating an incentive structure within the framework of the mortgage contract that "penalizes" prepayment when interest rates are low and "rewards" it when interest rates are high. This is the opposite of standard mortgages. The RTO incentive structure is based on a unique "buyout" feature. Borrowers who want to "buy out" the financial interest of the lender may do so whenever they want, but the "buyout price" is a negative function of the market interest rates prevailing currently, that is, at the time of the buyout. Hence the lower these rates, the higher the buyout price. Other advantages of the RTO mortgage are also described.