The National Home Equity Mortgage Association says two studies it released Thursday - one on risk-based pricing, the other on prepayment penalties - bolster the case for a bill to set federal standards for subprime lending.
One of the studies concluded that differences in mortgage rates are attributable to differences in risk. The other concluded that consumers who take out loans with prepayment penalties do get lower rates. Maury Shevin, the trade group's general counsel, said that the "political implications" of the studies are favorable for the Ney-Kanjorski bill, which the industry wants passed to replace the patchwork of state measures on subprime lending.
He said the reports did not have to do with the debate over the fairness of nonprime lending that has erupted in recent months as a result of new Home Mortgage Disclosure Act data.
In both of the studies, Richard F. Demong, a professor at the University of Virginia, and James E. Burroughs, an assistant professor there, analyzed a national database of 961,344 loans made last year.
Mr. Shevin said that by buttressing the idea that subprime lending is "a valuable tool for getting people homes," the risk-based pricing study's findings indirectly make a case for the bill. And the other study's findings on prepayment penalties support keeping such features legal under any federal bill, he said. (The Ney-Kanjorski bill, which was referred last month to a House Financial Services subcommittee, would allow such penalties.)
In that study, the researchers accounted for credit score, income, loan-to-value ratio, and income documentation and found that "the presence of a prepayment fee reduced the APR for a first mortgage loan by 60 basis points, adjustable-rate mortgages by 29 basis points, and interest-only loans by 20 basis points."
The study divided the borrowers into groups according to their credit scores. For some of the groups, the average savings for taking a prepayment penalty was 35 basis points, but none of the groups had an average savings higher than 43 basis points. The figures showed that consumers with better credit were not getting much more savings out of accepting the penalties than their counterparts with poorer credit, according to the study.
Another study released in January by the Center for Responsible Lending found that in 2002, consumers who took out 30-year fixed-rate subprime purchase loans with prepayment penalties paid on average 40 basis points more in interest than those who had loans without such penalties. Over the life of the loans, that study found, the rate difference could cost borrowers up to $881 million.
Mark Pearce, the nonprofit's lending director, wrote in an e-mail, "Unless NHEMA tells us more about its secret database, it would be hard to know if their data reflects the subprime mortgage market."
