Mortgage Prepayment, Race, and Monetary Policy
Abstract: This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.
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Provider: Federal Reserve Bank of Boston
Part of Series: Working Papers
Publication Date: 2020-09-01