Prepayment penalties effectively slow prepayment speeds across all types and issuers of subprime mortgages. But the effectiveness of penalties tends to be more pronounced at the A-minus end of the subprime spectrum and more pronounced in adjustable-rate mortgages than in fixed-rate products, according to an analysis by Mortgage Information Corp.
MIC's database contains more than 1.4 million subprime loans from a variety of issuers and is the largest compilation of subprime-loan data, the company said. It includes both subprime loans that were securitized and those held in portfolio, said Martin Wahl, an MIC director.
According to MIC's analysis of prepayment penalties, a substantial differential-more than 35%- was found in the second half of last year between A-minus ARMs with prepayment penalties and A-minus ARMs without them. The constant prepayment rate averaged 29.85% for A-minus ARMs with prepay penalties. Without prepay penalties, however, the CPR average rose to 41.36% for A-minus adjustable-rate. (The difference is 11.51% CPR, or 38.5%.)
At the other end of the spectrum, "C" subprime loans posted a differential that was closer to 17%. In the second half of last year, the CPR averaged 28.58% for fixed-rate C loans with prepay penalties and 32.98% for fixed-rate C paper without penalties.
Wahl noted that during the time period analyzed, prepayments were heavy, moderating some after the liquidity crunch last fall.
MIC's nonconforming database contains more than two dozen pertinent variables derived from the loan level. Wahl said the subprime database is the company's newest, launched in February 1997, with vintages dating from 1993 and with pre-1993 together as one. - ES