1932

Abstract

We assess the complicated reality of monetary policy transmission through mortgage markets by synthesizing the existing literature on the role of refinancing in policy implementation. After briefly reviewing mortgage market institutions in the USA and documenting refinance activity over time, we summarize the links between refinancing and consumption and describe the frictions impeding the refinancing channel. The review draws heavily on research emerging from the experience of the financial crisis of 2008–2009, as it highlights a combination of market, institutional, and policy-making factors that dulled the transmission mechanism. We conclude with a discussion of potential mortgage market innovations and the applicability of lessons learned to the ongoing stresses induced by the COVID-19 pandemic.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-012720-120430
2020-11-01
2024-05-24
Loading full text...

Full text loading...

/deliver/fulltext/financial/12/1/annurev-financial-012720-120430.html?itemId=/content/journals/10.1146/annurev-financial-012720-120430&mimeType=html&fmt=ahah

Literature Cited

  1. Abel J, Fuster A. 2018. How do mortgage refinances affect debt, default, and spending? Evidence from HARP Staff Rep. 841, Fed. Reserve Bank New York:
  2. Acharya VV, Richardson M, Van Nieuwerburgh S, White LJ 2011. Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  3. Adelino M, Gerardi K, Willen PS 2013. Why don't lenders renegotiate more home mortgages? Redefaults, self-cures and securitization. J. Monet. Econ. 60:7835–53
    [Google Scholar]
  4. Agarwal S, Amromin G, Ben-David I, Chomsisengphet S, Evanoff DD 2011. The role of securitization in mortgage renegotiation. J. Financ. Econ. 102:3559–78
    [Google Scholar]
  5. Agarwal S, Amromin G, Ben-David I, Chomsisengphet S, Piskorski T, Seru A 2017a. Policy intervention in debt renegotiation: evidence from the Home Affordable Modification Program. J. Political Econ. 125:3654–712
    [Google Scholar]
  6. Agarwal S, Amromin G, Chomsisengphet S, Landvoigt T, Piskorski T et al. 2017b. Mortgage refinancing, consumer spending, and competition: evidence from the Home Affordable Refinancing Program NBER Work. Pap 21512
  7. Agarwal S, Ben-David I, Yao V 2016. Systematic mistakes in the mortgage market and lack of financial sophistication. J. Financ. Econ. 123:142–58
    [Google Scholar]
  8. Agarwal S, Driscoll JC, Laibson DI 2013. Optimal mortgage refinancing: a closed-form solution. J. Money Credit Bank. 45:4591–622
    [Google Scholar]
  9. Agarwal S, Rosen RJ, Yao V 2019. Why do borrowers make mortgage refinancing mistakes. Manag. Sci. 62:123494–509
    [Google Scholar]
  10. Alexandrov A, Koulayev S. 2018. No shopping in the US mortgage market: direct and strategic effects of providing information Work. Pap. 2017-01, Off. Res., Consum. Financ. Prot. Bur Washington, DC:
  11. Allen J, Clark R, Houde JF 2014. Price dispersion in mortgage markets. J. Ind. Econ. 62:3377–416
    [Google Scholar]
  12. Amherst Securities 2010. Frictions in the HARP refi process Amherst Mortgage Insight
  13. Amromin G, Huang J, Sialm C, Zhong E 2018. Complex mortgages. Rev. Finance 22:61975–2007
    [Google Scholar]
  14. Amromin G, Kearns C. 2014. Access to refinancing and mortgage interest rates: HARPing on the importance of competition Work. Pap. 2014-25, Fed. Reserve Bank Chicago:
  15. Andersen S, Campbell JY, Nielsen KM, Ramadorai T 2015. Inattention and inertia in household finance: evidence from the Danish mortgage market NBER Work. Pap 21386
  16. Archer WR, Ling DC, McGill GA 1996. The effect of income and collateral constraints on residential mortgage terminations. Reg. Sci. Urban Econ. 26:3/4235–61
    [Google Scholar]
  17. Auclert A. 2019. Monetary policy and the redistribution channel. Am. Econ. Rev. 109:62333–67
    [Google Scholar]
  18. Badarinza C, Campbell JY, Ramadorai T 2018. What calls to ARMs? International evidence on interest rates and the choice of adjustable-rate mortgages. Manag. Sci. 64:52275–88
    [Google Scholar]
  19. Bajo E, Barbi M. 2018. Financial illiteracy and mortgage refinancing decisions. J. Bank. Finance 94:279–96
    [Google Scholar]
  20. Beraja M, Fuster A, Hurst E, Vavra J 2019. Regional heterogeneity and the refinancing channel of monetary policy. Q. J. Econ. 134:1109–83
    [Google Scholar]
  21. Berger D, Milbradt K, Tourre F, Vavra J 2018. Mortgage prepayment and path-dependent effects of monetary policy NBER Work. Pap 25157
  22. Bernanke BS, Reinhart VR, Sack BP 2004. Monetary policy alternatives at the zero bound: an empirical assessment Brookings Pap. Econ. Activity, Brookings Inst Washington, DC:
  23. Bhutta N. 2015. The ins and outs of mortgage debt during the housing boom and bust. J. Monet. Econ. 76:284–98
    [Google Scholar]
  24. Bhutta N, Fuster A, Hizmo A 2019. Paying too much? Price dispersion in the U.S. mortgage market. Work. Pap., Board Gov. Fed. Reserve Syst./Swiss Natl. Bank
  25. Bhutta N, Keys B. 2016. Interest rates and equity extraction during the housing boom. Am. Econ. Rev. 106:71742–74
    [Google Scholar]
  26. Bhutta N, Keys B. 2018. Eyes wide shut? The moral hazard of mortgage insurers during the housing boom NBER Work. Pap 24844
  27. Bond P, Elul R, Garyn-Tal S, Musto D 2017. Does Junior inherit? Refinancing and the blocking power of second mortgages. Rev. Financ. Stud. 30:1211–44
    [Google Scholar]
  28. Boyce A, Hubbard G, Mayer C, Witkin J 2012. Streamlined refinancings for up to 14 million borrowers Work. Pap., Columbia Univ New York:
  29. Brady PJ, Canner GB, Maki DM 2000. The effects of recent mortgage refinancing. Fed. Reserve Bull. 86:7441–50
    [Google Scholar]
  30. Brainard WC, Tobin J. 1968. Pitfalls in financial model building. Am. Econ. Rev. 58:299–122
    [Google Scholar]
  31. Bucks B, Pence K. 2008. Do borrowers know their mortgage terms. J. Urban Econ. 64:2218–33
    [Google Scholar]
  32. Calza A, Monacelli T, Stracca L 2013. Housing finance and monetary policy. J. Eur. Econ. Assoc. 11:Suppl. 1101–22
    [Google Scholar]
  33. Campbell JY. 2006. Household finance. J. Finance 56:41553–604
    [Google Scholar]
  34. Campbell JY. 2013. Mortgage market design. Rev. Finance 17:11–33
    [Google Scholar]
  35. Campbell JY, Cocco JF. 2003. Household risk management and optimal mortgage choice. Q. J. Econ. 118:41449–94
    [Google Scholar]
  36. Canner GB, Dynan K, Passmore W 2002. Mortgage refinancing in 2001 and early 2002. Fed. Reserve Bull. 88:12469–81
    [Google Scholar]
  37. Canner GB, Luckett CA, Durkin TA 1990. Mortgage refinancing. Fed. Reserve Bull. 76:8604–12
    [Google Scholar]
  38. Caplin A, Freeman C, Tracy J 1997. Collateral damage: refinancing constraints and regional recessions. J. Money Credit Bank. 29:4497–516
    [Google Scholar]
  39. CEA (Counc. Econ. Advis.) 2012. Economic report of the President: stabilizing and healing the housing market Rep., CEA Washington, DC:
  40. Chen H, Michaux M, Roussanov N 2020. Houses as ATMs? Mortgage refinancing and macroeconomic uncertainty. J. Finance 75:1323–75
    [Google Scholar]
  41. Cloyne J, Ferreira C, Surico P 2020. Monetary policy when households have debt: new evidence on the transmission mechanism. Rev. Financ. Stud. 87:1102–29
    [Google Scholar]
  42. Cochrane JH, Piazzesi M. 2002. The Fed and interest rates—a high-frequency identification. Am. Econ. Assoc. Pap. Proc. 92:290–95
    [Google Scholar]
  43. Cook T, Hahn T. 1989. The effect of changes in the federal funds rate target on market interest rates in the 1970s. J. Monet. Econ. 24:3331–51
    [Google Scholar]
  44. Cooper D. 2010. Did easy credit lead to overspending? Home equity borrowing and household behavior in the early 2000s Public Policy Discuss. Pap. 09-7, Fed. Reserve Bank Boston:
  45. Coulibaly B, Li G. 2009. Choice of mortgage contracts: evidence from the Survey of Consumer Finances. Real Estate Econ 37:4659–73
    [Google Scholar]
  46. Cumming F, Dettling L. 2020. Monetary policy and birth rates: the effect of mortgage rate pass-through on fertility Work. Pap., Fed. Reserve Board Finance Econ. Discuss. Ser. Washington, DC:
  47. D'Amico S, King TB. 2013. Flow and stock effects of large-scale Treasury purchases: evidence on the importance of local supply. J. Financ. Econ. 108:2425–48
    [Google Scholar]
  48. DeFusco AA, Mondragon J. 2020. No job, no money, no refi: frictions to refinancing in a recession. J. Finance 75:5) https://doi.org/10.1111/jofi.12952
    [Crossref] [Google Scholar]
  49. Deng Y, Quigley JM. 2012. Woodhead behavior and the pricing of residential mortgages Work. Pap., Lusk Cent. Real Estate, Univ. South. Calif Los Angeles:
  50. Di Maggio M, Kermani A, Keys BJ, Piskorski T, Ramcharan R et al. 2017. Interest rate pass-through: mortgage rates, household consumption, and voluntary deleveraging. Am. Econ. Rev. 107:113550–88
    [Google Scholar]
  51. Di Maggio M, Kermani A, Palmer CJ 2020. How quantitative easing works: evidence on the refinancing channel. Rev. Econ. Stud. 87:31498–528
    [Google Scholar]
  52. Dokko J, Keys BJ, Relihan L 2019. Affordability, financial innovation, and the start of the housing boom Work. Pap. 2019-01, Fed. Reserve Bank Chicago:
  53. Drechsler I, Savov A, Schnabl P 2018. Banking on deposits: maturity transformation without interest rate risk Work. Pap., NYU New York:
  54. Driscoll JC, Judson RA. 2013. Sticky deposit rates. Work. Pap. 2013-80, Fed. Reserve Board Finance Econ. Discuss. Ser Washington, DC:
    [Google Scholar]
  55. Dunn KB, McConnell JT. 1981. Valuation of GNMA mortgage-backed securities. J. Finance 36:3599–616
    [Google Scholar]
  56. Eberly J, Krishnamurthy A. 2014. Efficient credit policies in a housing debt crisis Brookings Pap. Econ. Activity, Brookings Inst Washington, DC:
  57. Ehrlich G, Perry J. 2017. Do large-scale refinancing programs reduce mortgage defaults? Evidence from a regression discontinuity design Work. Pap. 2015-06, Congr. Budg. Off Washington, DC:
  58. Eichenbaum M, Rebelo S, Wong A 2018. State dependent effects of monetary policy: the refinancing channel NBER Work. Pap 25152
  59. Farber HS, Valletta RG. 2015. Do extended unemployment benefits lengthen unemployment spells? Evidence from recent cycles in the US labor market. J. Hum. Resour. 50:4873–909
    [Google Scholar]
  60. Flodén M, Kilström M, Sigurdsson J, Vestman R 2019. Household debt and monetary policy: revealing the cash-flow channel Res. Pap. 166, Sver. Riksbank Stockholm: Swed .
  61. Foote CL, Gerardi KS, Willen PS 2012. Why did so many people make so many ex post bad decisions? The causes of the foreclosure crisis NBER Work. Pap 18082
  62. Frame WS, White LJ. 2005. Fussing and fuming over Fannie and Freddie: how much smoke, how much fire. J. Econ. Perspect. 19:2159–84
    [Google Scholar]
  63. Fuster A, Goodman L, Lucca D, Madar L, Molloy L, Willen P 2013. The rising gap between primary and secondary mortgage rates Econ. Policy Rev., Fed. Reserve Bank New York:
  64. Fuster A, Vickery J. 2015. Securitization and the fixed-rate mortgage. Rev. Financ. Stud. 28:1176–211
    [Google Scholar]
  65. Fuster A, Willen PS. 2010. $1.25 trillion is still real money: some facts about the effects of the Federal Reserve's mortgage market investments Public Policy Discuss. Pap., Fed. Reserve Bank Boston:
  66. Fuster A, Willen PS. 2017. Payment size, negative equity, and mortgage default. Am. Econ. J. Econ. Policy 9:4167–91
    [Google Scholar]
  67. Gagnon JE, Raskin M, Remache J, Sack B 2010. Large-scale asset purchases by the Federal Reserve: Did they work? Staff Rep. 441, Fed. Reserve Bank New York:
  68. Gerardi K, Herkenhoff K, Ohanian LE, Willen P 2018. Can't pay or won't pay? Unemployment, negative equity, and strategic default. Rev. Financ. Stud. 31:31089–131
    [Google Scholar]
  69. Gertler M, Karadi P. 2015. Monetary policy surprises, credit costs, and economic activity. Am. Econ. J. Macroecon. 7:144–76
    [Google Scholar]
  70. Gilchrist S, López-Salido D, Zakrajšek E 2015. Am. Econ. J. Macroecon. 7:177–109
  71. Green RK, LaCour-Little M. 1999. Some truths about ostriches: who doesn't prepay their mortgages and why they don't. J. Hous. Econ. 8:3233–48
    [Google Scholar]
  72. Green RK, Wachter SM. 2005. The American mortgage in historical and international context. J. Econ. Perspect. 19:493–114
    [Google Scholar]
  73. Greenwald DL. 2018. The mortgage credit channel of macroeconomic transmission Res. Pap. 5184-16, MIT Sloan Sch. Bus Cambridge, MA:
  74. Guren AM, Krishnamurthy A, McQuade TJ 2018. Mortgage design in an equilibrium model of the housing market NBER Work. Pap 24446
  75. Gurun UG, Matvos G, Seru A 2016. Advertising expensive mortgages. J. Finance 71:52371–416
    [Google Scholar]
  76. Hancock D, Passmore W. 2011. Did the Federal Reserve's MBS purchase program lower mortgage rates. J. Monet. Econ. 58:5498–514
    [Google Scholar]
  77. Hanson SG, Stein JC. 2015. Monetary policy and long-term real rates. J. Financ. Econ. 115:3429–48
    [Google Scholar]
  78. Hsu JW, Matsa DA, Melzer BT 2018. Unemployment insurance as a housing market stabilizer. Am. Econ. Rev. 108:149–81
    [Google Scholar]
  79. Hughson H, La Cava G, Ryan P, Smith P 2016. The household cash flow channel of monetary policy. Reserve Bank Aust. Bull. September 21–30
    [Google Scholar]
  80. Hurst E, Keys BJ, Seru A, Vavra J 2016. Regional redistribution through the US mortgage market. Am. Econ. Rev. 106:102982–3028
    [Google Scholar]
  81. Hurst E, Stafford F. 2004. Home is where the equity is: mortgage refinancing and household consumption. J. Money Credit Bank. 36:6985–1014
    [Google Scholar]
  82. Jaffee DM. 2015. An international perspective for mortgage market reform. J. Money Credit Bank. 47:Suppl. 159–67
    [Google Scholar]
  83. Jiang W, Nelson AA, Vytlacil E 2014. Liar's loan? Effects of origination channel and information falsification on mortgage delinquency. Rev. Econ. Stat. 96:11–18
    [Google Scholar]
  84. Johnson EJ, Meier S, Toubia O 2018. What's the catch? Suspicion of bank motives and sluggish refinancing. Rev. Financ. Stud. 32:2467–95
    [Google Scholar]
  85. Justiniano A, Primiceri GE, Tambalotti A 2017. The mortgage rate conundrum NBER Work. Pap 23784
  86. Keys BJ, Pope DG, Pope JC 2016. Failure to refinance. J. Financ. Econ. 122:3482–99
    [Google Scholar]
  87. Koijen RSJ, Van Hemert O, Van Nieuwerburgh SV 2009. Mortgage timing. J. Financ. Econ. 93:2292–324
    [Google Scholar]
  88. Krishnamurthy A, Vissing-Jorgensen A. 2011. The effects of quantitative easing on interest rates: channels and implications for policy Brookings Pap. Econ. Activity, Brookings Inst Washington, DC:
  89. Kuttner KN. 2001. Monetary policy surprises and interest rates: evidence from the Fed funds futures market. J. Monet. Econ. 47:3523–44
    [Google Scholar]
  90. Lea M. 2010. International Comparison of Mortgage Product Offerings. Washington, DC: Res. Inst. Hous. Am.
    [Google Scholar]
  91. Lovenheim MF. 2011. The effect of liquid housing wealth on college enrollment. J. Labor Econ. 29:4741–71
    [Google Scholar]
  92. Mayer C, Morrison E, Piskorski T, Gupta A 2014. Mortgage modification and strategic behavior: evidence from a legal settlement with Countrywide. Am. Econ. Rev. 104:92830–57
    [Google Scholar]
  93. Mayer C, Piskorski T, Tchistyi A 2013. The inefficiency of refinancing: why prepayment penalties are good for risky borrowers. J. Financ. Econ. 107:3694–714
    [Google Scholar]
  94. McCully BA, Pence KM, Vine DJ 2019. How much are car purchases driven by home equity withdrawal. J. Money Credit Bank. 51:51403–26
    [Google Scholar]
  95. Mian A, Sufi A. 2011. House prices, home equity-based borrowing, and the US household leverage crisis. Am. Econ. Rev. 101:52132–56
    [Google Scholar]
  96. Moench E, Vickery J, Aragon D 2010. Why is the market share of adjustable-rate mortgages so low?. Curr. Issues Econ. Finance 16:81–11
    [Google Scholar]
  97. Nakamura E, Steinsson J. 2018. High-frequency identification of monetary non-neutrality: the information effect. Q. J. Econ. 133:31283–330
    [Google Scholar]
  98. Oliner S, Peter T, Pinto EJ 2018. The wealth building home loan Work. Pap. 2017-23 Am. Enterp. Inst Washington, DC:
  99. Passmore W. 2005. The GSE implicit subsidy and the value of government ambiguity. Real Estate Econ 33:3465–86
    [Google Scholar]
  100. Passmore W, Sherlund SM. 2019. FHA, Fannie Mae, Freddie Mac and the Great Recession. Real Estate Econ https://doi.org/10.1111/1540-6229.12296
    [Crossref] [Google Scholar]
  101. Passmore W, von Hafften AH 2020. Financing affordable and sustainable homeownership with fixed-COFI mortgages. Reg. Sci. Urban Econ. 80:103392
    [Google Scholar]
  102. Pavlov AD. 2001. Competing risks of mortgage termination: Who refinances, who moves, and who defaults. J. Real Estate Finance Econ. 23:2185–211
    [Google Scholar]
  103. Piskorski T, Seru A. 2018. Mortgage market design: lessons from the Great Recession Brookings Pap. Econ. Activity, Brookings Inst Washington, DC:
  104. Piskorski T, Seru A, Vig V 2010. Securitization and distressed loan renegotiation: evidence from the subprime mortgage crisis. J. Financ. Econ. 97:3369–97
    [Google Scholar]
  105. Piskorski T, Tchistyi A. 2010. Optimal mortgage design. Rev. Financ. Stud. 23:83098–140
    [Google Scholar]
  106. Piskorski T, Tchistyi A. 2017. An equilibrium model of housing and mortgage markets with state-contingent lending contracts NBER Work. Pap 23452
  107. Rose J. 2011. The incredible HOLC? Mortgage relief during the Great Depression. J. Money Credit Bank. 43:61073–107
    [Google Scholar]
  108. Rose J. 2019. Short-term residential mortgage contracts in American economic history Work. Pap., Fed. Reserve Bank Cleveland, OH:
  109. Stanton R. 1995. Rational prepayment and the valuation of mortgage-backed securities. Rev. Financ. Stud. 8:3677–708
    [Google Scholar]
  110. Tracy J, Wright J. 2016. Payment changes and default risk: the impact of refinancing on expected credit losses. J. Urban Econ. 93:60–70
    [Google Scholar]
  111. Urban Inst 2013. Housing Finance at a Glance: A Monthly Chartbook Washington, DC: Hous. Finance Policy Cent., Urban Inst.
  112. Vickery J, Wright J. 2013. TBA trading and liquidity in the agency MBS market Econ. Policy Rev., Fed. Reserve Bank New York:
  113. Wong A. 2019. Refinancing and the transmission of monetary policy to consumption Work. Pap. http://www.arlene-wong.com/research
  114. Woodward SE, Hall RE. 2012. Diagnosing consumer confusion and sub-optimal shopping effort: theory and mortgage-market evidence. Am. Econ. Rev. 102:73249–76
    [Google Scholar]
  115. Yang TL, Maris BA. 1993. Mortgage refinancing with asymmetric information. Real Estate Econ 21:481–510
    [Google Scholar]
/content/journals/10.1146/annurev-financial-012720-120430
Loading
/content/journals/10.1146/annurev-financial-012720-120430
Loading

Data & Media loading...

Supplementary Data

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error