Predatory lending practices and subprime foreclosures: Distinguishing impacts by loan category

Abstract

A recent dramatic rise in subprime foreclosures has led to calls for restrictions against a range of loan features loosely termed “predatory.” Several cities and states have enacted regulations to curb predatory practices, and some advocacy groups endorse action at the federal level. Using data on subprime refinance and purchase mortgages from the Chicago metropolitan area, I examine the impact of long prepayment penalty periods, balloon payments and reduced documentation on the probability of foreclosure. Results suggest that the relationship between these loan features and foreclosure rates is much more complicated than the arguments for restricting their use assume.