Quick Exits of Subprime Mortgages

Abstract:     
All holders of mortgage contracts, regardless of type, have three options: keep their payments current, prepay (usually through refinancing), or default on the loan. The latter two options terminate the loan. The termination rates of subprime mortgages that originated each year from 2001 through 2006 are surprisingly similar: about 20, 50, and 80 percent, respectively, at one, two, and three years after origination. For loans originated when house prices appreciated the most, terminations were dominated by prepayments. For loans originated when the housing market slowed, defaults dominated. The similarity of the loan termination rates for all vintages in the sample suggests that subprime mortgage loans were intended to be "bridge" (i.e., temporary) loans. In addition, between 2001 and 2006, the number of terminated subprime purchase-money loans (loans used to purchase rather than refinance a house) outweighed the estimated number of first-time-homebuyers with subprime mortgages. The effect of the subprime lending on the increase of homeownership in the United States - a potentially positive outcome of subprime mortgages - most likely has been overstated.

Number of Pages in PDF File: 16

Keywords: subprime, mortgage, default, prepayment, termination, homeownership

JEL Classification: D12, G1, G21

Accepted Paper Series