Prepay penalties, balloons cited by University of North Carolina
By MortgageDaily.com staff
1/27/2005

Predatory lending terms, particularly prepayment penalties and balloon payments, significantly raise subprime borrowers' risks of losing their home, according to new research.

That was the conclusion of the first study ever to demonstrate that specific abusive loan terms lead to additional home losses, according to an announcement Tuesday by the Center for Community Capitalism at The University of North Carolina at Chapel Hill. The findings that subprime prepayment penalties and balloon payments increased the chances of foreclosure resulted even after controlling for the borrower's credit score, loan terms and varying economic conditions.

With the nine-fold expansion in the subprime loan originations between 1994 to 2003 -- growing from $35 billion to $332 billion -- foreclosure has become central to public policy debates. In the fourth quarter of 2003 alone, the percentage of all subprime loans that entered into foreclosure was more than ten times higher than the rate for all prime loans. A little over one-fifth of first-lien subprime refinance loans originated in 1999 entered into foreclosure by December 2003, the center reported.

"Given the significant financial and emotional costs associated with foreclosure on families and neighborhoods, policymakers should take note," commented Michael Stegman, one of the study's three authors, in the announcement.

The study reportedly found that subprime loans with prepayment penalties with terms of three years or longer faced 20% greater odds of entering into foreclosure than loans without the penalties. The odds lessened to 16% for loans with a prepayment penalty term of less than three years.

For subprime home loans with balloon payments, the odds of entering foreclosure were 46% greater than for mortgages without such terms, the authors said.

It was also found that borrowers with subprime adjustable-rate mortgages face 49% greater odds of entering foreclosure than borrowers with fixed-rate subprime loans.

Article © MortgageDaily.com All Rights Reserved