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The geography of subprime mortgage prepayment penalty patterns

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  • John Farris
  • Christopher Richardson

Abstract

Concern over abusive lending practices in the subprime mortgage market has grown in recent years. This article examines empirically the geographic variation in the use of prepayment penalties, a potentially abusive feature found in most subprime mortgage loans. While controlling for borrower and loan characteristics at the loan level, we use a comprehensive national database to estimate the effects of geography and minority concentration on the probability that subprime borrowers will receive mortgages with prepayment penalties of various lengths. Logistic regression model estimates indicate that, after controlling for a set of underwriting factors, loan type, and minority concentration, rural borrowers with subprime mortgage loans are generally more likely to receive prepayment penalties than their urban counterparts are. In addition, minority concentration shows a consistent, significantly positive correlation with the probability of receiving prepayment penalties. Our results call into question the use of such penalties in the subprime mortgage market.

Suggested Citation

  • John Farris & Christopher Richardson, 2004. "The geography of subprime mortgage prepayment penalty patterns," Housing Policy Debate, Taylor & Francis Journals, vol. 15(3), pages 687-714.
    • Handle: RePEc:taf:houspd:v:15:y:2004:i:3:p:687-714
    DOI: 10.1080/10511482.2004.9521517
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    Cited by:

    1. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    2. Gary Gorton, 2009. "The Subprime Panic," European Financial Management, European Financial Management Association, vol. 15(1), pages 10-46, January.
    3. W. Scott Frame & Lawrence J. White, 2009. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers 09-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Gary Gorton, 2008. "The Subprime Panic," Yale School of Management Working Papers amz2504, Yale School of Management.
    5. Rose, Morgan J., 2008. "Predatory lending practices and subprime foreclosures: Distinguishing impacts by loan category," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 13-32.
    6. Gary Gorton, 2008. "The Panic of 2007," Yale School of Management Working Papers amz2372, Yale School of Management.
    7. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    8. Gary Gorton, 2009. "The Subprime Panic," European Financial Management, European Financial Management Association, vol. 15(1), pages 10-46, January.
    9. Stephen L. Ross, 2005. "The Continuing Practice and Impact of Discrimination," Working papers 2005-19, University of Connecticut, Department of Economics, revised Jul 2006.
    10. Philip Ashton, 2009. "An Appetite for Yield: The Anatomy of the Subprime Mortgage Crisis," Environment and Planning A, , vol. 41(6), pages 1420-1441, June.

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