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Structural Change in the Mortgage Market and the Propensity to Refinance

  • Bennett, Paul
  • Peach, Richard
  • Peristiani, Stavros

We hypothesize that the intrinsic benefit required to trigger a refinancing has become smaller, due to a combination of technological, regulatory, and structural changes that have made mortgage origination more competitive and more efficient and have raised financial awareness of homeowners. To test this hypothesis, we estimate an empirical hazard model of loan survival for two subperiods, using a database that allows us to carefully control for homeowners' credit ratings, equity, loan size, and measurable transaction costs. Our findings strongly confirm that credit ratings and home equity have significant effects on the refinancing probability. In addition, we provide evidence that homeowners postpone refinancing in the face of increased interest rate volatility, consistent with option value theory. Finally, our results support the hypothesis that structural change in the mortgage market has increased homeowners' propensity to refinance.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 33 (2001)
Issue (Month): 4 (November)
Pages: 955-75

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Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:4:p:955-75
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. John C. Weicher, 1994. "The new structure of the housing finance system," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-65.
  2. Jerry Green & John B. Shoven, 1983. "The Effects of Interest Rates on Mortgage Prepayments," NBER Working Papers 1246, National Bureau of Economic Research, Inc.
  3. Patric H. Hendershott, 1990. "The Market for Home Mortgage Credit: Recent Changes and Future Prospects," NBER Working Papers 3548, National Bureau of Economic Research, Inc.
  4. Bradley, Michael G & Gabriel, Stuart A & Wohar, Mark E, 1995. "The Thrift Crisis, Mortgage-Credit Intermediation, and Housing Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 476-97, May.
  5. 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.
  6. 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.
  7. 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.
  8. Cunningham, Donald F & Capone, Charles A, Jr, 1990. " The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages," Journal of Finance, American Finance Association, vol. 45(5), pages 1687-1703, December.
  9. Glaeser, Edward L. & Kallal, Hedi D., 1997. "Thin Markets, Asymmetric Information, and Mortgage-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 64-86, January.
  10. 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.
  11. Follain, James R & Scott, Louis O & Yang, T L Tyler, 1992. "Microfoundations of a Mortgage Prepayment Function," The Journal of Real Estate Finance and Economics, Springer, vol. 5(2), pages 197-217, June.
  12. Andrew Caplin & Charles Freeman & Joseph Tracy, 1993. "Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions," NBER Working Papers 4531, National Bureau of Economic Research, Inc.
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