Research
Working Papers
Contractual Lock-In: Mortgage Prepayment Penalties and Mobility
Abstract: Do prepayment penalties lock-in borrowers, reducing mobility? Using monthly mortgage performance and borrower panel data, I study mobility before and after the expiration date of prepayment penalties. I find that borrowers increase mobility once the penalty expires: a penalty expiration leads to a 38% higher moving rate post-expiration relative to baseline moving rates in my sample. These expiration induced moves are to places with higher economic opportunities: the effect is just as strong for small and long distance moves and the moves are disproportionately to zipcodes with high levels of average income and high levels of upward income mobility. I then study what can explain these effects on mobility. I find that housing equity at the time the penalty expires is an important input into the mobility response of borrowers: very low and underwater LTV borrowers responses are muted, while most of the response comes from high, but <100 LTV borrowers. I interpret this finding to be consistent with credit constraints stemming from the housing market being an important financial friction to household mobility. These results imply that mortgage contract features can interact with credit market imperfections that result in large frictions to moves that would otherwise improve economic circumstances, even when borrowers are above water on their mortgage.
Awards
Stigler Center Ph.D. Dissertation Award and Bradley Fellow
John and Serena Liew Fama-Miller Research GrantÂ
Works in Progress
The Unintended Consequences of Deregulation: Evidence from the Savings and Loan Industry