A very interesting study [Updated Weblink] from the St. Louis Federal Reserve Bank on subprime mortgages from 2001 through 2006. The researchers found that 20, 50 and 80 percent of subprime mortgages are terminated after 1, 2 or 3 years, respectively. There are three ways to end a subprime mortgage; prepayment, refinance, or default.
The researchers found that subprime mortgages are intended to be temporary with 80 percent ended within three years after inception.
The study found that if there was house price appreciation after the mortgage was originated, it was more likely to be refinanced than defaulted. If there was no home price appreciation, then there was an increase in defaults of the subprime mortgages.
Once home prices stopped increasing and actually decreased, the risk of default on subprime mortgages increased, as the actual, recent data has shown
Other factors also contributed to the higher default rates, such as FICO scores and loan to value ratios and are discussed and in the study.
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