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Subprime refinancing: equity extraction and mortgage termination

Author

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  • Souphala Chomsisengphet
  • Anthony Pennington-Cross

Abstract

This paper examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market while refinancing and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate refinance loans. Consistent with survey evidence the propensity to extract equity while refinancing is sensitive to interest rates on other forms of consumer debt. After the loan is originated, our results indicate that cash-out refinances perform differently from non cash-out refinances. For example, cash-outs are less likely to default or prepay, and the termination of cash-outs is more sensitive to changing interest rates and house prices.

Suggested Citation

  • Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "Subprime refinancing: equity extraction and mortgage termination," Working Papers 2006-023, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2006-023
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Antje Berndt & Burton Hollifield & Patrik Sandås, 2010. "The Role of Mortgage Brokers in the Subprime Crisis," NBER Working Papers 16175, National Bureau of Economic Research, Inc.
    2. Michael LaCour-Little & Eric Rosenblatt & Vincent Yao, 2010. "Home Equity Extraction by Homeowners: 2000-2006," Journal of Real Estate Research, American Real Estate Society, vol. 32(1), pages 23-46.
    3. Ioan Voicu & Marilyn Jacob & Kristopher Rengert & Irene Fang, 2012. "Subprime Loan Default Resolutions: Do They Vary Across Mortgage Products and Borrower Demographic Groups?," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 939-964, November.
    4. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    5. Yuliya Demyanyk & Otto van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis.
    6. Ørjan Robstad, 2018. "House prices, credit and the effect of monetary policy in Norway: evidence from structural VAR models," Empirical Economics, Springer, vol. 54(2), pages 461-483, March.
    7. Roberto G. Quercia & Michael A. Stegman & Walter R. Davis, 2007. "The impact of predatory loan terms on subprime foreclosures: The special case of prepayment penalties and balloon payments," Housing Policy Debate, Taylor & Francis Journals, vol. 18(2), pages 311-346, January.
    8. Yuliya Demyanyk, 2009. "Quick exits of subprime mortgages," Review, Federal Reserve Bank of St. Louis, vol. 91(Mar), pages 79-94.

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