Household Income, Termination Risk and Mortgage Pricing

Posted: 22 Jan 2003

See all articles by Wayne R. Archer

Wayne R. Archer

University of Florida - Warrington College of Business Administration

David C. Ling

University of Florida - Warrington College of Business Administration

Gary A. McGill

University of Florida - Fisher School of Accounting

Abstract

The premium embedded in home mortgage loans to compensate investors for their exposure to prepayment risk is a significant component of the cost of home mortgage lending. Moreover, there is some reason to believe that prepayment risk may be lower for loans to lower-income housing borrowers, especially those that are first-time home owners. If so, investor recognition of this advantage should facilitate greater willingness to acquire portfolios of lower-income housing loans, and encourage more competitive pricing in this segment of the market. This study investigates the possibility of differential mortgage prepayment behavior between lower-income home owners and non-low income home owners. The investigation relies on samples of the American Housing Survey spanning ten years of experience from 1985 to 1995. We find no significant difference between the termination or refinancing behavior of non-low income and low-income households. This result is robust to a number of alternative specifications such as restricting the low-income test group to non-moving households and to first-time owners. The same conclusions are derived from both aggregate prepayment rates and from analysis of individual household prepayment behavior.

Keywords: mortgage termination, mortgage prepayment, mortgage pricing, low-income homeownership

Suggested Citation

Archer, Wayne R. and Ling, David Curtis and McGill, Gary A., Household Income, Termination Risk and Mortgage Pricing. Available at SSRN: https://ssrn.com/abstract=351180

Wayne R. Archer

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States
352-392-1330 (Phone)
352-392-0301 (Fax)

David Curtis Ling (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9307 (Phone)
352-392-0301 (Fax)

Gary A. McGill

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0219 (Phone)
352-392-7962 (Fax)

HOME PAGE: http://warrington.ufl.edu/fsoa/faculty/facultyinfo.asp?WEBID=1132

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