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Origination Channel, Prepayment Penalties, and Default

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  • Morgan J. Rose

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    (UMBC)

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    Abstract

    This paper presents evidence that non-bank-originated subprime mortgages have a higher probability of default than bank-originated subprime mortgages, but only for loans with prepayment penalties. Evidence also indicates that non-banks price prepayment penalties less favorably to borrowers than banks do, and non-banks originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State anti-predatory lending law provisions restricting the use of prepayment penalties eliminate the elevated default risk of non-bank originations relative to bank originations. These findings are consistent with incentives generated by non-bank compensation via yield spread premiums on loans with prepayment penalties.

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    File URL: http://www.umbc.edu/economics/wpapers/wp_10_124.pdf
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    Bibliographic Info

    Paper provided by UMBC Department of Economics in its series UMBC Economics Department Working Papers with number 10-124.

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    Length: 47 pages
    Date of creation: 01 Jul 2010
    Date of revision: 01 Jul 2011
    Handle: RePEc:umb:econwp:10124

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    Web page: http://www.umbc.edu/economics
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    Related research

    Keywords: foreclosure; prepayment penalties; mortgage brokers; financial regulation; anti-predatory lending laws.;

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    1. Anthony Pennington-Cross & Giang Ho, 2010. "The Termination of Subprime Hybrid and Fixed-Rate Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 38(3), pages 399-426.
    2. Ho, Giang & Pennington-Cross, Anthony, 2006. "The impact of local predatory lending laws on the flow of subprime credit," Journal of Urban Economics, Elsevier, vol. 60(2), pages 210-228, September.
    3. Anthony Pennington-Cross & Giang Ho, 2008. "Predatory Lending Laws and the Cost of Credit," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 36(2), pages 175-211, 06.
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