Subprime Refinancing: Equity Extraction and Mortgage Termination

31 Pages Posted: 24 May 2007

See all articles by Anthony Pennington-Cross

Anthony Pennington-Cross

Marquette University - Dept. of Finance

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

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Abstract

This article examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate of refinance loans. Consistent with survey evidence, the propensity to extract equity is sensitive to the relative interest rates of other forms of consumer debt. After the loan is originated, our results indicate that cash-out refinances perform differently from noncash-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.

Suggested Citation

Pennington-Cross, Anthony N. and Chomsisengphet, Souphala, Subprime Refinancing: Equity Extraction and Mortgage Termination. Real Estate Economics, Vol. 35, No. 2, pp. 233-263, Summer 2007, Available at SSRN: https://ssrn.com/abstract=987690 or http://dx.doi.org/10.1111/j.1540-6229.2007.00189.x

Anthony N. Pennington-Cross (Contact Author)

Marquette University - Dept. of Finance ( email )

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

Souphala Chomsisengphet

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

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

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