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Household Income, Termination Risk and Mortgage Pricing

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  • Archer, Wayne R
  • Ling, David C
  • McGill, Gary A

Abstract

The premium embedded in home mortgage loans to compensate investors for their exposure to prepayment risk is a significant component of the cost of home mortgage lending. Moreover, there is some reason to believe that prepayment risk may be lower for loans to lower-income housing borrowers, especially those that are first-time home owners. If so, investor recognition of this advantage should facilitate greater willingness to acquire portfolios of lower-income housing loans, and encourage more competitive pricing in this segment of the market. This study investigates the possibility of differential mortgage prepayment behavior between lower-income home owners and non-low income home owners. The investigation relies on samples of the American Housing Survey spanning ten years of experience from 1985 to 1995. We find no significant difference between the termination or refinancing behavior of non-low income and low-income households. This result is robust to a number of alternative specifications such as restricting the low-income test group to non-moving households and to first-time owners. The same conclusions are derived from both aggregate prepayment rates and from analysis of individual household prepayment behavior. Copyright 2003 by Kluwer Academic Publishers

Suggested Citation

  • Archer, Wayne R & Ling, David C & McGill, Gary A, 2003. "Household Income, Termination Risk and Mortgage Pricing," The Journal of Real Estate Finance and Economics, Springer, vol. 27(1), pages 111-138, July.
    • Handle: RePEc:kap:jrefec:v:27:y:2003:i:1:p:111-38
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    Cited by:

    1. Valentina Hartarska & Claudio Gonzalez-Vega, 2005. "Credit Counseling and Mortgage Termination by Low-Income Households," The Journal of Real Estate Finance and Economics, Springer, vol. 30(3), pages 227-243, April.
    2. Hartarska, Valentina M. & Gonzalez-Vega, Claudio, 2003. "Credit Counseling and Mortgage Termination by Low-Income Households," 2003 Regional Committee NCT-194, October 6-7, 2003; Kansas City, Missouri 132518, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.

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