The effect of prepayment penalties on the pricing of subprime mortgages

Gregory Elliehausen, Michael E. Staten, Jevgenijs Steinbuks

Research output: Contribution to journalArticle

20 Scopus citations

Abstract

This paper investigates the effect of prepayment penalties on the pricing of subprime residential mortgages. The paper is the first to consider that mortgage price and prepayment penalty may be chosen jointly, making single-equation estimates of the effect of prepayment penalty on price biased. Using a model that accounts for endogeneity of price, loan to value, and prepayment penalty, we find that prepayment penalties are associated with lower loan prices. This finding is important because perceptions that prepayment penalties harm borrowers have led many states to restrict their use, regulation that may reverse the gains in credit availability achieved over the last decade.

Original languageEnglish (US)
Pages (from-to)33-46
Number of pages14
JournalJournal of Economics and Business
Volume60
Issue number1-2
DOIs
StatePublished - Jan 1 2008
Externally publishedYes

Keywords

  • Financial regulation
  • Prepayment penalties
  • Subprime mortgages

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics

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