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Household Income, Termination Risk and Mortgage Pricing

Household Income, Termination Risk and Mortgage Pricing The premium embedded in home mortgage loans to compensate investors for their exposure to prepayment risk is a significant component of the cost of home mortgage lending. Moreover, there is some reason to believe that prepayment risk may be lower for loans to lower-income housing borrowers, especially those that are first-time home owners. If so, investor recognition of this advantage should facilitate greater willingness to acquire portfolios of lower-income housing loans, and encourage more competitive pricing in this segment of the market. This study investigates the possibility of differential mortgage prepayment behavior between lower-income home owners and non-low income home owners. The investigation relies on samples of the American Housing Survey spanning ten years of experience from 1985 to 1995. We find no significant difference between the termination or refinancing behavior of non-low income and low-income households. This result is robust to a number of alternative specifications such as restricting the low-income test group to non-moving households and to first-time owners. The same conclusions are derived from both aggregate prepayment rates and from analysis of individual household prepayment behavior. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Household Income, Termination Risk and Mortgage Pricing

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References (30)

Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
DOI
10.1023/A:1023663530674
Publisher site
See Article on Publisher Site

Abstract

The premium embedded in home mortgage loans to compensate investors for their exposure to prepayment risk is a significant component of the cost of home mortgage lending. Moreover, there is some reason to believe that prepayment risk may be lower for loans to lower-income housing borrowers, especially those that are first-time home owners. If so, investor recognition of this advantage should facilitate greater willingness to acquire portfolios of lower-income housing loans, and encourage more competitive pricing in this segment of the market. This study investigates the possibility of differential mortgage prepayment behavior between lower-income home owners and non-low income home owners. The investigation relies on samples of the American Housing Survey spanning ten years of experience from 1985 to 1995. We find no significant difference between the termination or refinancing behavior of non-low income and low-income households. This result is robust to a number of alternative specifications such as restricting the low-income test group to non-moving households and to first-time owners. The same conclusions are derived from both aggregate prepayment rates and from analysis of individual household prepayment behavior.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 4, 2004

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