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Origination Channel, Prepayment Penalties, and Default

Morgan Rose ()

No 10-124, UMBC Economics Department Working Papers from UMBC Department of Economics

Abstract: This paper presents evidence that non-bank-originated subprime mortgages have a higher probability of default than bank-originated subprime mortgages, but only for loans with prepayment penalties. Evidence also indicates that non-banks price prepayment penalties less favorably to borrowers than banks do, and non-banks originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State anti-predatory lending law provisions restricting the use of prepayment penalties eliminate the elevated default risk of non-bank originations relative to bank originations. These findings are consistent with incentives generated by non-bank compensation via yield spread premiums on loans with prepayment penalties.

Keywords: foreclosure; prepayment penalties; mortgage brokers; financial regulation; anti-predatory lending laws. (search for similar items in EconPapers)
JEL-codes: G21 G28 G01 D18 L85 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2010-07-01, Revised 2011-07-01
New Economics Papers: this item is included in nep-ban and nep-ure
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http://www.umbc.edu/economics/wpapers/wp_10_124.pdf (application/pdf)

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Journal Article: Origination Channel, Prepayment Penalties and Default (2012) Downloads
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