Post by Sapphire Capital on Nov 5, 2008 0:04:15 GMT 4
Effects of Regulation on Prepayment and Default of Subprime Mortgages
Jevgenijs Steinbuks
University of Cambridge - Department of Economics
September 2008
Paolo Baffi Centre Research Paper No. 2008-25
Abstract:
This study examines the effects of restrictions on prepayment penalties on prepayment and default termination of subprime mortgages from both a theoretical and empirical perspective. The theoretical results suggest that, if lenders substitute points for prepayment penalties, prepayment rates will rise and defaults fall. Consistent with predictions of theoretical model empirical results indicate that predatory lending laws lowered default rates and raised prepayment rates in the subprime market. Estimates from competing risks models of mortgage termination on 30-year fixed-rate subprime mortgage data suggest that, controlling for other factors, the estimated probabilities of prepayment are higher in the states that have introduced predatory lending laws and restricted prepayment penalties. Though no definite conclusions could be drawn regarding the effect of state laws on subprime defaults, there is some evidence that early defaults have decreased as the scope of regulation expanded.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1263796_code962400.pdf?abstractid=1263796&mirid=3
Jevgenijs Steinbuks
University of Cambridge - Department of Economics
September 2008
Paolo Baffi Centre Research Paper No. 2008-25
Abstract:
This study examines the effects of restrictions on prepayment penalties on prepayment and default termination of subprime mortgages from both a theoretical and empirical perspective. The theoretical results suggest that, if lenders substitute points for prepayment penalties, prepayment rates will rise and defaults fall. Consistent with predictions of theoretical model empirical results indicate that predatory lending laws lowered default rates and raised prepayment rates in the subprime market. Estimates from competing risks models of mortgage termination on 30-year fixed-rate subprime mortgage data suggest that, controlling for other factors, the estimated probabilities of prepayment are higher in the states that have introduced predatory lending laws and restricted prepayment penalties. Though no definite conclusions could be drawn regarding the effect of state laws on subprime defaults, there is some evidence that early defaults have decreased as the scope of regulation expanded.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1263796_code962400.pdf?abstractid=1263796&mirid=3