The Role of Prepayment Penalties in Mortgage Loans

37 Pages Posted: 24 Mar 2015

See all articles by Andrea Beltratti

Andrea Beltratti

Bocconi University - Department of Finance

Matteo Benetton

London School of Economics & Political Science (LSE) - London School of Economics; 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: March 2015

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 before and after the reform, we provide evidence that: 1) before the reform, mortgages issued to riskier borrowers included larger penalties; 2) higher prepayment penalties decreased borrowers' prepayments; 3) higher prepayment penalties did not affect borrowers' delinquencies; and 4) prepayment penalties indirectly affected prepayments and delinquencies through borrowers' mortgage selection at origination, especially for riskier borrowers.

Keywords: mortgages, prepayment penalties

JEL Classification: G21

Suggested Citation

Beltratti, Andrea and Benetton, Matteo and Benetton, Matteo and Gavazza, Alessandro, The Role of Prepayment Penalties in Mortgage Loans (March 2015). CEPR Discussion Paper No. DP10504, Available at SSRN: https://ssrn.com/abstract=2584021

Andrea Beltratti (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Matteo Benetton

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

United Kingdom

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

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

Alessandro Gavazza

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

Houghton Street
London WC2A 2AE
United Kingdom

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