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Subprime refinancing: equity extraction and mortgage termination

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  • Souphala Chomsisengphet
  • Anthony Pennington-Cross

Abstract

This paper examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market while refinancing and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate refinance loans. Consistent with survey evidence the propensity to extract equity while refinancing is sensitive to interest rates on 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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-023.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2006-023

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Keywords: Mortgages ; Mortgage loans;

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