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Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions

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  • Andrew Caplin
  • Charles Freeman
  • Joseph Tracy

Abstract

In the current structure of the U.S. residential mortgage market, a fall in property values may make it very difficult for homeowners to refinance their mortgages to take advantage of falling interest rates. In this paper, we explain the institutional background for this effect and quantify its importance. We confirm that this form of collateral constraint has greatly reduced recent refinancing in states with depressed property markets. We also point to the many ways in which the reduction in refinancing may have inflicted additional damage in these already recession-hit states. Finally, we show that relatively minor institutional changes could have neutralized the damaging effects of the collateral constraints, and we discuss why the institutions have their current structure.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4531.

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Date of creation: Nov 1993
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Publication status: published as Journal of Money, Credit, and Banking, Vol.29, no.4, part 1 (November 1997), pp. 496-516.
Handle: RePEc:nbr:nberwo:4531

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  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Mark L. Gertler & R. Glenn Hubbard, 1988. "Financial Factors in Business Fluctuations," NBER Working Papers 2758, National Bureau of Economic Research, Inc.
  3. Donald R. Haurin & Patric H. Hendershott, 1991. "House Price Indexes: Issues and Results," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 19(3), pages 259-269.
  4. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, Econometric Society, vol. 52(2), pages 271-320, March.
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Cited by:
  1. Engelhardt, Gary V., 2003. "Nominal loss aversion, housing equity constraints, and household mobility: evidence from the United States," Journal of Urban Economics, Elsevier, vol. 53(1), pages 171-195, January.
  2. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1996. "The effect of income and collateral constraints on residential mortgage terminations," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(3-4), pages 235-261, June.
  3. Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Structural change in the mortgage market and the propensity to refinance," Staff Reports, Federal Reserve Bank of New York 45, Federal Reserve Bank of New York.
  4. Downing, Chris & Stanton, Richard & Wallace, Nancy E., 2003. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Research Program in Finance, Working Paper Series, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley qt2qb613r5, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  5. Michael LaCour-Little & Michael Marschoun & Clark L. Maxam, 2002. "Improving Parametric Mortgage Prepayment Models with Non-parametric Kernel Regression," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 24(3), pages 299-328.
  6. Owen Lamont & Jeremy C. Stein, 1999. "Leverage and House-Price Dynamics in U.S. Cities," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 498-514, Autumn.
  7. Sewin Chan, 1995. "Residential Mobility and Mortgages," NBER Working Papers 5181, National Bureau of Economic Research, Inc.
  8. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc.
  9. Marek Lubiński, 2012. "Wpływ akceleratora finansowego na przebieg wahań koniunkturalnych [ Impact of Financial Accelerator on Business Cycle Fluctuations ]," Prace i Materiały, Instytut Rozwoju Gospodarczego (SGH), Instytut Rozwoju Gospodarczego (SGH), vol. 88(1), pages 63-84.
  10. Hendershott, Patric H., 1996. "Introduction and overview," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(3-4), pages 227-234, June.
  11. Chan, Sewin, 1996. "Residential mobility and mortgages," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(3-4), pages 287-311, June.
  12. Chris Downing & Richard Stanton & Nancy Wallace, 2003. "An empirical test of a two-factor mortgage valuation model: how much do house prices matter?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-42, Board of Governors of the Federal Reserve System (U.S.).
  13. S. Peristiani & P. Bennett & G. Monsen & R. Peach & J. Raiff, 1996. "Effects of household creditworthiness on mortgage refinancings," Research Paper, Federal Reserve Bank of New York 9622, Federal Reserve Bank of New York.
  14. Sewin Chan, 1998. "Spatial Lock-in: Do Falling House Prices Constrain Residential Mobility?," Departmental Working Papers, Rutgers University, Department of Economics 199816, Rutgers University, Department of Economics.
  15. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1997. "Demographic versus Option-Driven Mortgage Terminations," Journal of Housing Economics, Elsevier, Elsevier, vol. 6(2), pages 137-163, June.
  16. Gary Engelhardt, 2001. "Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 42, Center for Policy Research, Maxwell School, Syracuse University.

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