The geography of subprime mortgage prepayment penalty patterns

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.