The inefficiency of refinancing
Subtitle: why prepayment penalties are good for risky borrowers
By: Christopher J. Mayer, Tomasz Piskorski, Alexei Tchistyi
Contributors: Piskorski, Tomasz; Tchistyi, Alexei; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16586; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16586.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default.  We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately composed of the riskiest borrowers over time.  Mortgages with prepayment penalties allow lenders to lower mortgage rates and extend credit to the least creditworthy, with the largest benefits going to the riskiest borrowers, who have the most incentive to refinance in response to positive credit shocks.  Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages is consistent with the key predictions of our model.  Our results suggest that regulations banning refinancing penalties might have the unintended consequence of restricting access to credit and raising rates for the least creditworthy borrowers"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 3/31/2011.

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