RACIAL AND ETHNIC DISPARITIES IN MORTGAGE PREPAYMENT

This paper examines mortgage prepayment rates for White, Black, and Hispanic borrowers. Loan-level data from the VA's mortgage program for loans written between 1971 and 1989 are used to estimate a prepayment function. Substantial differences are found between Blacks and Whites in prepayment behavior. The higher prepayment rate for White borrowers relative to Black borrowers is more than can be can be explained by differences in foreclosure rates, loan size, or estimated equity and is not consistent with an explanation based solely on mobility differences. Differences between White and Hispanic prepayment rates are much smaller. The results indicate that lending to Black borrowers may be more profitable than lending to White borrowers at times of stable or falling interest rates. The lower prepayment risk for Black borrowers may more than offset the higher credit risk found in some studies. (C) 1995 Academic Press, Inc.