Origination Channel, Prepayment Penalties, and Default
Real Estate Economics, Forthcoming
Posted: 11 Aug 2011
Date Written: August 11, 2011
This paper presents evidence that non-bank-originated sub-prime mortgages have a higher probability of default than bank-originated sub-prime 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 origination's relative to bank origination's. 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: Suggested Citation