Mortgage Prepayment, Race, and Monetary Policy

Kristopher Gerardi, Paul Willen and David Hao Zhang

No 20-7, Working Papers from Federal Reserve Bank of Boston

Abstract: This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.

Keywords: race; quantitative easing; monetary policy; mortgage rates; refinance; prepayment; default (search for similar items in EconPapers)
JEL-codes: E52 G21 G51 (search for similar items in EconPapers)
Pages: 55
Date: 2020-09-01
New Economics Papers: this item is included in nep-cba, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Mortgage prepayment, race, and monetary policy (2023)
Working Paper: Mortgage Prepayment, Race, and Monetary Policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:88882

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DOI: 10.29412/res.wp.2020.07

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