In Finance, what is a Steady State?

In the mortgage industry, steady state is a stage of development in a mortgage-backed security (MBS) pool. When interest rates drop, mortgagors often start overpaying the principal on their mortgages to lower their balances in preparation for refinancing. A mortgage enters steady state after interest rates reach a point likely to encourage mortgagors to refinance, when the amount of overpayment becomes stable, making the end yield of the financial returns of the security more predictable. Steady state can be used to describe a stable economic state that lacks fluctuations of significant recession or growth.

An MBS pool is a security that is backed by mortgages that have been purchased from banks and bundled into securities for investors. These types of investment pools usually include residential properties, but mortgages from commercial properties are occasionally pooled into securities as well. After investing in the pool, an MBS pool owner collects on interest and principal payments of the mortgages in the bundle. Though an MBS pool can mean a steady and predictable income, economic changes and bundles of risky sub-prime mortgages can make some MBS pools pernicious investments. Usually, MBS pools are issued by government-affiliated organizations that guarantee that the investors receive on-time payment of their investment returns.

When a mortgage pool reaches the steady state stage, payments become static, and the MBS owner can more accurately predict how much the change in interest rates will affect his return. The amount of interest return that an investor receives is called the yield. If a mortgagor starts paying extra on a mortgage to reduce the balance, the owner of the MBS pool will experience reduced yield because he will make less interest on the mortgage. When a mortgagor makes extra payments on a mortgage, it is called "curtailment" if he pays more than the required monthly balance and "prepayment" if he pays off the entire balance of the mortgage.

A steady state economy is an economic theory that suggests the adoption of an economy designed to sustain itself efficiently. This type of economic theory is in contrast to more common theories that claim that economic prosperity relies on growth. Proponents of the steady state economy believe that the ecosystem has 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 the poor parts of the world permanently poor.