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Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions

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Author Info
Andrew Caplin
Charles Freeman
Joseph Tracy

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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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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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Handle: RePEc:nbr:nberwo:4531

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References listed on IDEAS
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  1. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March. [Downloadable!] (restricted)
  2. Mark L. Gertler & R. Glenn Hubbard, 1989. "Financial Factors in Business Fluctuations," NBER Working Papers 2758, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Donald R. Haurin & Patric H. Hendershott, 1991. "House Price Indexes: Issues and Results," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 259-269. [Downloadable!] (restricted)
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  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. 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 2003-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Paul Bennett & Richard Peach & Stavros Peristiani, 1997. "Structural change in the mortgage market and the propensity to refinance," Research Paper 9736, Federal Reserve Bank of New York. [Downloadable!]
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  4. S. Peristiani & P. Bennett & G. Monsen & R. Peach & J. Raiff, 1996. "Effects of household creditworthiness on mortgage refinancings," Research Paper 9622, Federal Reserve Bank of New York. [Downloadable!]
  5. Sewin Chan, 1998. "Spatial Lock-in: Do Falling House Prices Constrain Residential Mobility?," Departmental Working Papers 199816, Rutgers University, Department of Economics. [Downloadable!]
  6. 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, vol. 24(3), pages 299-328. [Downloadable!]
  7. Gary Engelhardt, 2001. "Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States," Center for Policy Research Working Papers 42, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  8. Owen Lamont & Jeremy C. Stein, 1997. "Leverage and House-Price Dynamics in U.S. Cities," NBER Working Papers 5961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Chris Downing & Richard Stanton & Nancy Wallace, 2003. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Research Program in Finance, Working Paper Series 1011, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  10. Wayne Archer & David C. Ling & Gary A. McGill, 1995. "The Effect of Income and Collateral Constraints on Residential Mortgage Terminations," NBER Working Papers 5180, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Sewin Chan, 1995. "Residential Mobility and Mortgages," NBER Working Papers 5181, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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