The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers

This research was completed while Mayer was a Visiting Scholar at the Federal Reserve Board and the Federal Reserve Bank of New York. We thank Patrick Bolton, Bruce Carlin, Raj Chetty, Douglas Diamond, Scott Frame, Mark Garmaise, Mikhail Golosov, Daniel Hubbard, Randall Kroszner, David Laibson, Karen Pence, Mitch Peterson, Rafael Repullo, Tony Sanders, Shane Sherlund, Chester Spatt, Jeremy Stein, Suresh Sundaresan, Aleh Tsyvinski, Neng Wang, Matthew Weinzierl, and seminar participants at Columbia Business School, UC Berkeley, Harvard, Chicago Fed, UC Irvine, AEA Annual Meeting, NBER Corporate Finance meeting, NBER Housing and Public Policy meeting, Stanford Institute for Theoretical Economics meeting, AREUEA summer meeting, 3rd NYC Real Estate Meeting, University of Virginia Law School conference on "Law and Economics of Consumer Credit", SED meeting, Summer Real Estate Symposium, AREUEA annual meeting for helpful comments and suggestions. Adam Ashcraft, Andrew Haughwout, Andreas Lehnert, Karen Pence, and Joe Tracy provided invaluable help in putting together and understanding the data. Alex Chinco and Rembrandt Koning provided excellent research assistance and helpful modeling suggestions. The research was supported by the Paul Milstein Center for Real Estate at Columbia Business School. The comments are the opinions of the authors and do not represent the views of the Federal Reserve System or the National Bureau of Economic Research.