Subprime refinancing: equity extraction and mortgage termination

Souphala Chomsisengphet and Anthony Pennington-Cross

No 2006-023, Working Papers from Federal Reserve Bank of St. Louis

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: Mortgages; Mortgage loans (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-fmk and nep-ure
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Citations: View citations in EconPapers (8)

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