Subprime Refinancing: Equity Extraction and Mortgage Termination
FRB of St. Louis Working Paper No. 2006-023A
44 Pages Posted: 20 Apr 2006
Date Written: April 2006
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: Suggested Citation