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

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 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

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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