The Termination of Subprime Hybrid and Fixed Rate Mortgages

Adjustable-rate and hybrid loans have been a larger component of subprime mortgage lending in the mortgage market than prime lending. The typical adjustable-rate loan in subprime is a hybrid of fixed and adjustable characteristics in which the first 2 years are fixed and the remaining 28 years adjustable. Hybrid loans terminate at elevated probabilities even before the first adjustment date. Hybrid loan terminations are sensitive to interest rates and teaser rates (payment shocks). Default probabilities increase dramatically when payment shocks are mixed with low or no equity in the home. This is the mixture of events that helped to trigger the 2007/2008 subprime mortgage crisis

The Varying Effects of Predatory Lending Laws on High-Cost Mortgage Applications

Federal, state, and local predatory lending laws are designed to restrict and in some cases prohibit certain types of high-cost mortgage credit in the subprime market. Empirical evidence using the spatial variation in these laws shows that the aggregate flow of high-cost mortgage credit can increase, decrease, or be unchanged after these laws are enacted. Although it may seem counterintuitive to find that a law that prohibits lending could be associated with more lending, it is hypothesized that a law may reduce the cost of sorting honest loans from dishonest loans and lessen borrowers’ fears of predation, thus stimulating the high-cost mortgage market

Predatory Lending Laws and the Cost of Credit

Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This article examines whether these laws are associated with a higher or lower cost of credit. Empirical results indicate that the laws are associated with at most a modest increase in cost. However, the impact depends on the product type. In particular, loans with fixed (adjustable) rates are associated with a modest increase (decrease) in cost

Local Predatory Lending Laws: Going Beyond North Carolina

Following the lead of federal regulations, numerous states, counties and cities have enacted laws designed to reduce predatory lending. There is at least anecdotal evidence that predatory or abusive mortgage lending is primarily concentrated in the subprime market. However, the impact of these local predatory lending laws on the subprime mortgage market is unknown. The primary questions we examine are: do these laws affect the supply and flow of subprime mortgage credit and does the experience in North Carolina, the first state to enact a local predatory lending law, apply to other local laws

The Impact of Local Predatory Lending Laws on the Flow of Subprime Credit

Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open-end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. Empirical results show that the typical local predatory lending law tends to reduce rejections, while having little impact on the flow (application and origination) of credit. However, the strength of the law, measured by the extent of market coverage and the extent of prohibitions, can have strong impacts on both the flow of credit and rejections

The varying effects of predatory lending laws on high-cost mortgage applications

Federal, state, and local predatory lending laws are designed to restrict and in some cases prohibit certain types of high-cost mortgage credit in the subprime market. Empirical evidence using the spatial variation in these laws shows that the aggregate flow of high-cost mortgage credit can increase, decrease, or be unchanged after these laws are enacted. Although it may seem counterintuitive to find that a law that prohibits lending could be associated with more lending, it is hypothesized that a law may reduce the cost of sorting honest loans from dishonest loans and lessen borrowers' fears of predation, thus stimulating the high-cost mortgage market.Mortgages ; Banking law ; Home equity loans

The impact of local predatory lending laws

Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open-end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. This paper provides a detailed summary of various local predatory lending laws that are effective as of the end of 2004. We also create an index that captures differences in the strength of the local laws along the two important dimensions of coverage and restrictions. In addition, our univariate results show that there is substantial heterogeneity in the observed market responses to the local laws.Predatory lending ; Mortgages ; Banking law ; Home equity loans

The termination of subprime hybrid and fixed rate mortgages

Adjustable rate and hybrid loans have been a large and important component of subprime lending in the mortgage market. While maintaining the familiar 30-year term the typical adjustable rate loan in subprime is designed as a hybrid of fixed and adjustable characteristics. In its most prevalent form, the first two years are typically fixed and the remaining 28 years adjustable. Perhaps not surprisingly, using a competing risks proportional hazard framework that also accounts for unobserved heterogeneity, hybrid loans are sensitive to rising interest rates and tend to temporarily terminate at much higher rates when the loan transforms into an adjustable rate. However, these terminations are dominated by prepayments not defaults.Mortgages ; Adjustable rate mortgages

Loan servicer heterogeneity and the termination of subprime mortgages

After a mortgage is originated the borrower promises to make scheduled payments to repay the loan. These payments are sent to the loan servicer, who may be the original lender or some other firm. This firm collects the promised payments and distributes the cash flow (payments) to the appropriate investor/lender. A large data set (loan-level) of securitized subprime mortgages is used to examine if individual servicers are associated with systematic differences in mortgage performance (termination). While accounting for unobserved heterogeneity in a competing risk (default and prepay) proportional hazard framework, individual servicers are associated with substantial and economically meaningful impacts on loan termination.Mortgages ; Banking law ; Home equity loans

Predatory lending laws and the cost of credit

Mortgages ; Banking law ; Home equity loans