Origination Channel, Prepayment Penalties, and Default
Morgan J. Rose
University of Maryland, Baltimore County; Office of the Comptroller of the Currency
July 6, 2011
Real Estate Economics, Forthcoming
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.
Keywords: foreclosure, prepayment penalties, yield spread premiums, mortgage brokers, financial regulation
JEL Classification: G21, G28, G01, D18, L85
Date posted: July 21, 2011
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