No Job,No Money,No Refi: Frictions to Refinancing in a Recession |
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| Authors: | ANTHONY A DEFUSCO JOHN MONDRAGON |
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| Institution: | 1. Correspondence: Anthony DeFusco, Kellogg School of Management, Northwestern University, 2211 Campus Drive, Office 4463, Evanston, IL 60208;2. e-mail: anthony.defusco@kellogg.northwestern.edu.;3. Anthony A. DeFusco and John Mondragon are with the Kellogg School of Management at Northwestern University. We thank seminar participants at the Bank of England, BYU, the Central Bank of Ireland, Stanford, UC Berkeley, NYU, HUD, ITAM, LSE, the Federal Reserve Board, the Federal Reserve Bank of Philadelphia, and the Federal Reserve Bank of San Francisco;4. as well as conference participants at the NBER Monetary Economics meeting, SITE Financial Regulation session, NYU Household Finance Conference, SED, the New York Fed Conference on Developments in Empirical Macroeconomics, the University of Washington Summer Finance Conference, the Texas Finance Festival, the Pre-WFA Real Estate Conference, the UW Madison Conference on Real Estate, and the AREUEA National Conference, for comments and suggestions. We are especially grateful to our discussants Hamilton Fout, Andra Ghent, Tim McQuade, and Wenlen Qian. Finally, we would like to thank Brent Ambrose, George Baker, and Brian Chappelle for very helpful conversations regarding institutional details of the FHA and the Streamline Refinance Program. The authors gratefully acknowledge financial support from the Guthrie Center for Real Estate Research at Northwestern University. Both authors have read The Journal of Finance disclosure policy and have no conflicts of interest to 5. disclose. |
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| Abstract: | We study how employment documentation requirements and out-of-pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass-through. To study their effects on refinancing, we exploit a Federal Housing Administration policy change that excluded unemployed borrowers from refinancing and increased others' out-of-pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out-of-pocket costs. Our results imply that unemployed and liquidity-constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy. |
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