No Job, No Money, No Refi: Frictions to Refinancing in a Recession

Frictions that prevent households from being able to refinance their mortgages during a recession may significantly inhibit the efficacy of monetary policy. In this paper, we study two important and counter-cyclical refinancing frictions: the need to document employment and the need to pay upfront closing costs. To quantify the effect of these frictions on refinancing, we exploit a sharp policy change introduced by the Federal Housing Administration (FHA) during the height of the Great Recession that eliminated the ability for unemployed borrowers to refinance and increased the out-of-pocket closing costs for many others. We find that this policy change had very large effects on FHA borrowers; it led to a reduction in the monthly probability of refinancing of about 0.7 percentage points, which is more than 50 percent of the pre-shock average. This reduction in refinancing is concentrated among borrowers likely to be unemployed and among those newly required to pay for closing costs out-of-pocket. Taken together, our results imply a high latent demand for refinancing among the unemployed and underscore the importance of liquidity constraints as a potential barrier to refinancing.