Predatory loan terms, especially prepayment penalties and balloon payments, increase the risk of mortgage foreclosure with sub-prime home loans even after controlling for a borrower’s credit score, loan terms and economic conditions, according to a new report.
While previous studies have demonstrated a correlation between sub-prime lending and foreclosures, these findings are the first to demonstrate that specific abusive loan terms lead to additional home losses. The study was conducted by the Center for Community Capitalism at the University of North Carolina at Chapel Hill
“The study demonstrates that sub-prime prepayment penalties and balloon payments place Americans at substantially greater risk of losing their homes,” said Dr.
Michael A. Stegman, Director of UNC’s Center for Community Capitalism. “Given the significant financial and emotional costs associated with foreclosure on families and neighborhoods, policymakers should take note.”
Foreclosure has become central to public policy debates as the sub-prime market has expanded. The volume of sub-prime loan originations grew more than nine-fold, from $35 billion to $332 billion, between 1994 and 2003. During the fourth quarter of 2003, 2.13 percent of all sub-prime loans across the country entered foreclosure. That percentage was more than ten times higher than the rate for all prime loans. Over time, these foreclosure starts accumulate. For example, 20.7 percent of all first-lien sub-prime refinance loans originated in 1999 had entered foreclosure by December 2003.