Subprime Refinancing: Equity Extraction and Mortgage Termination

FRB of St. Louis Working Paper No. 2006-023A

44 Pages Posted: 20 Apr 2006

See all articles by Souphala Chomsisengphet

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Anthony Pennington-Cross

Marquette University - Dept. of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

This paper examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market while refinancing and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate refinance loans. Consistent with survey evidence the propensity to extract equity while refinancing is sensitive to interest rates on other forms of consumer debt. After the loan is originated, our results indicate that cash-out refinances perform differently from non cash-out refinances. For example, cash-outs are less likely to default or prepay, and the termination of cash-outs is more sensitive to changing interest rates and house prices.

Keywords: Mortgage, Refinance, Cash-out, Consumption

JEL Classification: D14, G21

Suggested Citation

Chomsisengphet, Souphala and Pennington-Cross, Anthony N., Subprime Refinancing: Equity Extraction and Mortgage Termination (April 2006). FRB of St. Louis Working Paper No. 2006-023A, Available at SSRN: https://ssrn.com/abstract=897276 or http://dx.doi.org/10.2139/ssrn.897276

Souphala Chomsisengphet (Contact Author)

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Anthony N. Pennington-Cross

Marquette University - Dept. of Finance ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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