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 language | English (US) |
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Pages (from-to) | 33-46 |
Number of pages | 14 |
Journal | Journal of Economics and Business |
Volume | 60 |
Issue number | 1-2 |
DOIs | |
State | Published - Jan 2008 |
Externally published | Yes |
Keywords
- Financial regulation
- Prepayment penalties
- Subprime mortgages
ASJC Scopus subject areas
- General Business, Management and Accounting
- Economics and Econometrics