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Structural change in the mortgage market and the propensity to refinance

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  • Paul Bennett
  • Richard Peach
  • Stavros Peristiani

Abstract

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. 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 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 clearly support the hypothesis that structural change in the mortgage market has increased homeowners' propensity to refinance.

Suggested Citation

  • 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.
    • Handle: RePEc:fip:fednrp:9736
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. John C. Weicher, 1994. "The new structure of the housing finance system," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-65.
    4. Paul Bennett & Gordon Monsen & Richard Peach & Stavros Peristiani & Jonathan Raiff, 1996. "Effects of household creditworthiness on mortgage refinancings," Research Paper 9622, Federal Reserve Bank of New York.
    5. 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.
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    9. 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 476-497, May.
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