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The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers / Christopher J. Mayer, Tomasz Piskorski, Alexei Tchistyi.
- Format:
- Book
- Author/Creator:
- Mayer, Christopher J.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w16586.
- NBER working paper series no. w16586
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- The Inefficiency of Refinancing
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2010.
- Summary:
- This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately composed of the riskiest borrowers over time. Mortgages with prepayment penalties allow lenders to lower mortgage rates and extend credit to the least creditworthy, with the largest benefits going to the riskiest borrowers, who have the most incentive to refinance in response to positive credit shocks. Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages is consistent with the key predictions of our model. Our results suggest that regulations banning refinancing penalties might have the unintended consequence of restricting access to credit and raising rates for the least creditworthy borrowers.
- Notes:
- Print version record
- December 2010.
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