Working Paper: NBER ID: w28039
Authors: Gene Amromin; Neil Bhutta; Benjamin J. Keys
Abstract: We assess the complicated reality of monetary policy transmission through mortgage markets by synthesizing the existing literature on the role of refinancing in policy implementation. After briefly reviewing mortgage market institutions in the U.S. and documenting refinance activity over time, we summarize the links between refinancing and consumption, and describe the frictions impeding the refinancing channel. The paper draws heavily on research emerging from the experience of the financial crisis of 2008-09, as it highlights a combination of market, institutional, and policy-making factors that dulled the transmission mechanism. We conclude with a discussion of potential mortgage market innovations, and the applicability of lessons learned to the ongoing stresses induced by the COVID-19 pandemic.
Keywords: mortgage; mortgage rates; refinance; consumption; monetary policy; equity extraction; fixed rate mortgage; adjustable rate mortgage; credit availability; credit constraints
JEL Codes: D12; D14; E50; G21; G51; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in short-term interest rates induced by the Federal Reserve (E43) | Lower mortgage rates (G21) |
| Lower mortgage rates (G21) | Enables homeowners to refinance their mortgages (G21) |
| Enables homeowners to refinance their mortgages (G21) | Reduces the present value of debt obligations (G32) |
| Reduces the present value of debt obligations (G32) | Increases household wealth and income (G59) |
| Increases household wealth and income (G59) | Stimulates consumption (E21) |
| Monetary policy actions (E52) | Influence the cost of credit (G21) |
| Refinancing activity (G21) | Household consumption patterns (D10) |
| Transaction costs associated with refinancing (G19) | Impedes refinancing (G21) |
| Households' ability to refinance (G51) | Contingent on creditworthiness and availability of housing equity (G51) |
| Financial crisis of 2008-2009 (G01) | Highlighted limitations of refinancing channel (G21) |