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Mortgage Refinancing Activity: An Explanation [1990–2001]

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  • Jill Wetmore

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  • Chiaku Ndu

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    Abstract

    Mortgage refinancing activity reached unprecedented high levels during 1990–2001. Using GARCH to control for heteroskedasticity and separating the data into regimes to control for potential structural changes over time, we estimate a model explaining changes in mortgage refinancing activity over the period studied. We find changes in refinancing activity to be negatively related to current as well as past changes in the 30-year mortgage rate with a declining significant lag over time. Similarly, there is a significant lagged dependent variable with a declining lag. Moreover, mortgage refinancing activity is a substitute for other investments during certain regimes. These results offer evidence that home owners cash out the mortgage for other investments. The lags suggest that the process is delayed for a variety of reasons. The declining lag signals a faster response by consumers. The reasons for a faster response include a consumer perception that interest rates have “bottomed out,” the presence of an increase in consumer sophistication, and improvements in technology and market coordination that facilitate and reduce the cost of the refinancing process. Copyright Springer Science + Business Media, LLC 2006

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    File URL: http://hdl.handle.net/10.1007/s11146-006-8275-4
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    Bibliographic Info

    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 33 (2006)
    Issue (Month): 1 (August)
    Pages: 75-86

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    Handle: RePEc:kap:jrefec:v:33:y:2006:i:1:p:75-86

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    Web page: http://www.springerlink.com/link.asp?id=102945

    Related research

    Keywords: Banking; Interest rates; Mortgages; Mortgage prepayment; Refinancing;

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    1. Patric H. Hendershott & Robert Van Order, 1988. "Pricing Mortgages: An Interpretation of the Models and Results," NBER Working Papers 2290, National Bureau of Economic Research, Inc.
    2. Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Structural change in the mortgage market and the propensity to refinance," Staff Reports 45, Federal Reserve Bank of New York.
    3. Andrew H. Chen & David C. Ling, 1989. "Optimal Mortgage Refinancing with Stochastic Interest Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(3), pages 278-299.
    4. Paul Bennett & Frank Keane & Patricia C. Mosser, 1999. "Mortgage refinancing and the concentration of mortgage coupons," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Mar).
    5. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1997. "Demographic versus Option-Driven Mortgage Terminations," Journal of Housing Economics, Elsevier, vol. 6(2), pages 137-163, June.
    6. T.L. Tyler Yang & Brian A. Maris, 1993. "Mortgage Refinancing with Asymmetric Information," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 481-510.
    7. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
    8. Peter J. Brady & Glenn B. Canner & Dean M. Maki, 2000. "The effects of recent mortgage refinancing," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 441-450.
    9. Giliberto, S Michael & Thibodeau, Thomas G, 1989. "Modeling Conventional Residential Mortgage Refinancings," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 285-99, December.
    10. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    11. Edward J. Kane & Haluk Unal, 1988. "Change in Market Assessments of Deposit-Institution Riskiness," NBER Working Papers 2530, National Bureau of Economic Research, Inc.
    12. Stavros Peristiani & Paul Bennett & Gordon Monsen & Richard Peach & Jonathan Raiff, 1997. "Credit, equity, and mortgage refinancings," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 83-99.
    13. McConnell, John J & Singh, Manoj, 1994. " Rational Prepayments and the Valuation of Collateralized Mortgage Obligations," Journal of Finance, American Finance Association, vol. 49(3), pages 891-921, July.
    14. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
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