Effects of Prepayment Regulations on Termination of Subprime Mortgages

Because of their higher interest rates, subprime mortgages are subject to substantial prepayment risk as borrowers who succeed in improving their creditworthiness systematically prepay leaving those with higher credit risk in the mortgage pool. Lenders anticipated this problem and attached substanti...

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Bibliographic Details
Main Author:	Steinbuks, Jevgenijs
Format:	Journal Article
Language:	en_US
Published:	Elsevier 2015
Subjects:	subprime mortgages banking regulation loan prepayment loan defaults
Online Access:	http://hdl.handle.net/10986/22759

id	okr-10986-22759
recordtype	oai_dc
spelling	okr-10986-227592021-04-23T14:04:11Z Effects of Prepayment Regulations on Termination of Subprime Mortgages Steinbuks, Jevgenijs subprime mortgages banking regulation loan prepayment loan defaults Because of their higher interest rates, subprime mortgages are subject to substantial prepayment risk as borrowers who succeed in improving their creditworthiness systematically prepay leaving those with higher credit risk in the mortgage pool. Lenders anticipated this problem and attached substantial prepayment penalties to subprime mortgages. Some state governments responded with regulations that banned prepayment penalties. This created a natural experiment in which the effects of prepayment penalties on the supply and performance of endorsed mortgages can be evaluated. Ho and Pennington Cross (2008) have demonstrated that these regulations reduced the supply of mortgage credit. In this paper, the effect of prepayment penalty restrictions on the performance of endorsed subprime mortgages is tested. Theory predicts that the restrictions should raise prepayment and lower default. The empirical results strongly confirm the first prediction while the effects on default have the correct sign but lack significance. 2015-10-09T14:52:57Z 2015-10-09T14:52:57Z 2015-07-30 Journal Article Journal of Banking and Finance 0378-4266 http://hdl.handle.net/10986/22759 en_US CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Elsevier Publications & Research Publications & Research :: Journal Article United States
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	subprime mortgages banking regulation loan prepayment loan defaults
spellingShingle	subprime mortgages banking regulation loan prepayment loan defaults Steinbuks, Jevgenijs Effects of Prepayment Regulations on Termination of Subprime Mortgages
geographic_facet	United States
description	Because of their higher interest rates, subprime mortgages are subject to substantial prepayment risk as borrowers who succeed in improving their creditworthiness systematically prepay leaving those with higher credit risk in the mortgage pool. Lenders anticipated this problem and attached substantial prepayment penalties to subprime mortgages. Some state governments responded with regulations that banned prepayment penalties. This created a natural experiment in which the effects of prepayment penalties on the supply and performance of endorsed mortgages can be evaluated. Ho and Pennington Cross (2008) have demonstrated that these regulations reduced the supply of mortgage credit. In this paper, the effect of prepayment penalty restrictions on the performance of endorsed subprime mortgages is tested. Theory predicts that the restrictions should raise prepayment and lower default. The empirical results strongly confirm the first prediction while the effects on default have the correct sign but lack significance.
format	Journal Article
author	Steinbuks, Jevgenijs
author_facet	Steinbuks, Jevgenijs
author_sort	Steinbuks, Jevgenijs
title	Effects of Prepayment Regulations on Termination of Subprime Mortgages
title_short	Effects of Prepayment Regulations on Termination of Subprime Mortgages
title_full	Effects of Prepayment Regulations on Termination of Subprime Mortgages
title_fullStr	Effects of Prepayment Regulations on Termination of Subprime Mortgages
title_full_unstemmed	Effects of Prepayment Regulations on Termination of Subprime Mortgages
title_sort	effects of prepayment regulations on termination of subprime mortgages
publisher	Elsevier
publishDate	2015
url	http://hdl.handle.net/10986/22759
_version_	1764452143505342464

Effects of Prepayment Regulations on Termination of Subprime Mortgages

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