Origination Channel, Prepayment Penalties and Default

46 Pages Posted: 28 Dec 2012

See all articles by Morgan J. Rose

Morgan J. Rose

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

Date Written: Winter 2012


This article presents evidence that nonbank‐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 nonbanks price prepayment penalties less favorably to borrowers than banks do, and nonbanks originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State antipredatory lending law provisions restricting the use of prepayment penalties eliminate the elevated default risk of nonbank originations relative to bank originations. These findings are consistent with incentives generated by nonbank compensation via yield spread premiums on loans with prepayment penalties.

Suggested Citation

Rose, Morgan J., Origination Channel, Prepayment Penalties and Default (Winter 2012). Real Estate Economics, Vol. 40, Issue 4, pp. 662-707, 2012, Available at SSRN: https://ssrn.com/abstract=2194269 or http://dx.doi.org/10.1111/j.1540-6229.2011.00328.x

Morgan J. Rose (Contact Author)

University of Maryland, Baltimore County ( email )

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Baltimore, MD 21250
United States
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Office of the Comptroller of the Currency

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Washington, DC 20219
United States

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