The Role of Prepayment Penalties in Mortgage Loans

40 Pages Posted: 15 Mar 2015 Last revised: 7 Apr 2017

See all articles by Andrea Beltratti

Andrea Beltratti

Bocconi University - Department of Finance

Matteo Benetton

University of California, Berkeley - Haas School of Business

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

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Date Written: April 1, 2017

Abstract

We study the effect of mortgage prepayment penalties on borrowers' prepayments and delinquencies by exploiting a 2007 reform in Italy that reduced penalties on outstanding mortgages and banned penalties on newly-issued mortgages. Using a unique dataset of mortgages issued by a large Italian lender, we provide evidence that: 1) before the reform, mortgages issued to riskier borrowers included larger penalties; 2) higher prepayment penalties decreased borrowers' prepayments; and 3) higher prepayment penalties did not affect borrowers' delinquencies. Moreover, we find suggestive evidence that prepayment penalties affected mortgage pricing, as well as prepayments and delinquencies through borrowers' mortgage selection at origination, most notably for riskier borrowers.

Keywords: Mortgages, Prepayment Penalties, Household Finance

JEL Classification: G21

Suggested Citation

Beltratti, Andrea and Benetton, Matteo and Gavazza, Alessandro, The Role of Prepayment Penalties in Mortgage Loans (April 1, 2017). Available at SSRN: https://ssrn.com/abstract=2578260 or http://dx.doi.org/10.2139/ssrn.2578260

Andrea Beltratti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Matteo Benetton

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Alessandro Gavazza (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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