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Subprime Refinancing: Equity Extraction and Mortgage Termination

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Author Info
Anthony Pennington-Cross
Souphala Chomsisengphet

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Abstract

This article examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate of refinance loans. Consistent with survey evidence, the propensity to extract equity is sensitive to the relative interest rates of other forms of consumer debt. After the loan is originated, our results indicate that cash-out refinances perform differently from non-cash-out refinances. For example, cash-outs are less likely to default or prepay, and the termination of cash-outs is more sensitive to changing interest rates and house prices. Copyright 2007 American Real Estate and Urban Economics Association

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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 35 (2007)
Issue (Month): 2 (06)
Pages: 233-263
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Handle: RePEc:bla:reesec:v:35:y:2007:i:2:p:233-263

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Michelle H. Dreiman & Anthony Pennington-Cross, 2004. "Alternative Methods of Increasing the Precision of Weighted Repeat Sales House Prices Indices," The Journal of Real Estate Finance and Economics, Springer, vol. 28(4), pages 299-317, 05. [Downloadable!]
  2. David M. Harrison & Thomas G. Noordewier & Abdullah Yavas, 2004. "Do Riskier Borrowers Borrow More?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 385-411, 09. [Downloadable!] (restricted)
  3. Tamim Bayoumi & Hali Edison, 2003. "Is Wealth Increasingly Driving Consuption?," DNB Staff Reports (discontinued) 101, Netherlands Central Bank. [Downloadable!]
  4. Green, Richard K. & LaCour-Little, Michael, 1999. "Some Truths about Ostriches: Who Doesn't Prepay Their Mortgages and Why They Don't," Journal of Housing Economics, Elsevier, vol. 8(3), pages 233-248, September. [Downloadable!] (restricted)
  5. Stavros Peristiani & Paul Bennett & Gordon Monsen & Richard Peach & Jonathan Raiff, 1997. "Credit, equity, and mortgage refinancings," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 83-99. [Downloadable!]
  6. Glenn Canner & Karen Dynan & Wayne Passmore, 2002. "Mortgage refinancing in 2001 and early 2002," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 469-481. [Downloadable!]
  7. Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Implied mortgage refinancing thresholds," Staff Reports 49, Federal Reserve Bank of New York. [Downloadable!]
  8. Green, Jerry & Shoven, John B, 1986. "The Effects of Interest Rates on Mortgage Prepayments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 41-59, February. [Downloadable!] (restricted)
  9. Joseph Tracy & Henry Schneider & Sewin Chan, 1999. "Are stocks overtaking real estate in household portfolios?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Apr. [Downloadable!]
  10. Pennington-Cross, Anthony, 2003. "Credit History and the Performance of Prime and Nonprime Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 279-301, November. [Downloadable!] (restricted)
  11. Erik Heitfield & Tarun Sabarwal, 2004. "What Drives Default and Prepayment on Subprime Auto Loans?," The Journal of Real Estate Finance and Economics, Springer, vol. 29(4), pages 457-477, December. [Downloadable!]
    Other versions:
  12. John D. Benjamin & Peter Chinloy & G. Donald Jud, 2004. "Why do Households Concentrate Their Wealth in Housing?," Journal of Real Estate Research, American Real Estate Society, vol. 26(4), pages 329-344. [Downloadable!]
  13. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
  14. Richard A. Phillips & James H. VanderHoff, 2004. "The Conditional Probability of Foreclosure: An Empirical Analysis of Conventional Mortgage Loan Defaults," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 571-587, December. [Downloadable!] (restricted)
  15. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    Other versions:
  16. Cowan, Adrian M. & Cowan, Charles D., 2004. "Default correlation: An empirical investigation of a subprime lender," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 753-771, April. [Downloadable!] (restricted)
  17. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June. [Downloadable!] (restricted)
  18. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May. [Downloadable!] (restricted)
  19. Follain, James R & Scott, Louis O & Yang, T L Tyler, 1992. "Microfoundations of a Mortgage Prepayment Function," The Journal of Real Estate Finance and Economics, Springer, vol. 5(2), pages 197-217, June.
  20. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 677-708. [Downloadable!] (restricted)
  21. John D. Benjamin & Peter Chinloy & G. Donald Jud, 2004. "Real Estate Versus Financial Wealth in Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 29(3), pages 341-354, November. [Downloadable!]
  22. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  23. Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis. [Downloadable!]
  24. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "The evolution of the subprime mortgage market," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-56. [Downloadable!]
  25. Peter J. Brady & Glenn B. Canner & Dean M. Maki, 2000. "The effects of recent mortgage refinancing," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 441-450. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis. [Downloadable!]
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