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Origination Channel, Prepayment Penalties, and Foreclosure (Rose M. J.)

Mortgage Regulation

Abstract This paper presents evidence that broker-originated subprime mortgages have a higher probability of foreclosure than bank-originated subprime mortgages, but only for loans with prepayment penalties. Evidence also indicates that brokers price prepayment penalties less favorably to borrowers than bank originators, and brokers originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State anti-predatory lending law provisions restricting the use of prepayment penalties eliminate the elevated foreclosure risk of broker originations relative to bank originations. These findings are consistent with incentives generated by broker compensation via yield spread premiums on loans with prepayment penalties.
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Libref/ Rose M. J. (2010) "Origination Channel, Prepayment Penalties, and Foreclosure", UMBC Economics Department Working Paper No. 10-124, pp. 1 - 47
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