Structural Change In the Mortgage Market and the Propensity To Refinance

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Research Papers

Structural Change In the Mortgage Market and the Propensity To Refinance

November 1997 Number 9736

Authors: Paul Bennett, Richard Peach, and Stavros Peristiani

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.

Available only in PDF PDF

34 pages / 950 kb

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