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Origination Channel, Prepayment Penalties, and Default

Real Estate Economics, Forthcoming

Posted: 21 Jul 2011  

Morgan J. Rose

University of Maryland, Baltimore County; Office of the Comptroller of the Currency

Multiple version iconThere are 2 versions of this paper

Date Written: July 6, 2011


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

Suggested Citation

Rose, Morgan J., Origination Channel, Prepayment Penalties, and Default (July 6, 2011). Real Estate Economics, Forthcoming. Available at SSRN:

Morgan J. Rose (Contact Author)

University of Maryland, Baltimore County ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-8485 (Phone)

Office of the Comptroller of the Currency

400 7th Street SW
Washington, DC 20219
United States

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