Origination Channel, Prepayment Penalties, and Default
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.
|Date of creation:||01 Jul 2010|
|Date of revision:||01 Jul 2011|
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- 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, vol. 38(3), pages 399-426.
- Anthony Pennington-Cross & Giang Ho, 2006. "The termination of subprime hybrid and fixed rate mortgages," Working Papers 2006-042, Federal Reserve Bank of St. Louis.
- Anthony Pennington-Cross & Giang Ho, 2008. "Predatory Lending Laws and the Cost of Credit," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(2), pages 175-211, 06.
- Giang Ho & Anthony Pennington-Cross, 2006. "Predatory lending laws and the cost of credit," Working Papers 2006-022, Federal Reserve Bank of St. Louis.
- 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.
- Giang Ho & Anthony Pennington-Cross, 2006. "The impact of local predatory lending laws on the flow of subprime credit," Working Papers 2006-009, Federal Reserve Bank of St. Louis.
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