What are the drawbacks of conduit loans?

Conduit loans are risky for all parties involved, including the borrower, the lender and the investor. The borrower receives a low interest rate on the loan but forfeits flexibility. He or she cannot prepay the loan without substantial risk of financial penalty. For the lender, issuing a conduit loan is a way to securitize a mortgage. If one borrower defaults, the investors are the ones who lose out. If multiple borrowers default, however, the lender is the one that suffers. In this case, the lender's financial standing, including its rating, could drop sharply. This can even render the lender insolvent if the loss is large enough. 


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