Working Paper: NBER ID: w0918
Authors: Patric H. Hendershott; Sheng Hu; Kevin E. Villani
Abstract: The paper begins with the development of models explaining the mortgage refinancing and assumption decisions of households Having identified the economic variables influencing these decisions, we then simulate the models for different values to determine under what conditions households will refinance or assume. Finally, we draw some implications of these results for: (1) the impact of a decline in mortgage rates on the asset portfolio yields of mortgage lending institutions and (2) the effect of the observed rise in interest rate volatility, including the optimal terminations response of mortgage borrowers, on the terms of the mortgage contract and the returns to mortgage lenders on recently issued mortgage loans.
Keywords: mortgage; refinancing; assumption; interest rates; mortgage lenders
JEL Codes: G21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declining mortgage rates (G21) | increased refinancing activity (G21) |
| current mortgage rates (G21) | decision to refinance (G11) |
| costs of refinancing (G32) | decision to refinance (G11) |
| increased volatility (E32) | more frequent refinancing and assumptions (G51) |
| new mortgage rates fall below existing rates (E43) | households will refinance (G51) |
| new mortgage rates rise above existing rates (E43) | homeowners allow assumptions of old mortgages (G21) |
| decision to refinance (G11) | decrease in the yield for lenders (G21) |
| homeowners allow assumptions of old mortgages (G21) | increase in the duration of existing loans (G21) |
| increase in the duration of existing loans (G21) | capital losses for lenders (G21) |