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Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty

75 Pages Posted: 22 Jun 2012 Last revised: 16 Sep 2013

Hui Chen

Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)

Michael Michaux

University of Southern California - Marshall School of Business

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Date Written: September 15, 2013

Abstract

We estimate a structural model of household liquidity management in the presence of long-term mortgages. Households face counter-cyclical idiosyncratic labor income uncertainty and borrowing constraints, which affect optimal choices of leverage, precautionary saving in liquid assets and illiquid home equity, debt repayment, mortgage refinancing, and default. Taking the observed historical path of house prices, aggregate income, and interest rates as given, the model quantitatively accounts for the run-up in household debt and consumption boom prior to the financial crisis, their subsequent collapse, and mild recovery following the Great Recession, especially among the most constrained households.

Keywords: mortgage refinancing, home equity, housing collateral, liquidity constraints, household consumption and saving decisions, leverage

JEL Classification: E21, E44, G2

Suggested Citation

Chen, Hui and Michaux, Michael and Roussanov, Nikolai L., Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty (September 15, 2013). Available at SSRN: https://ssrn.com/abstract=2024392 or http://dx.doi.org/10.2139/ssrn.2024392

Hui Chen

Massachusetts Institute of Technology ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
617-324-3896 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Michaux

University of Southern California - Marshall School of Business ( email )

Marshall School of Business, FBE
3670 Trousdale Parkway, BRI-308
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~michaux/

Nikolai L. Roussanov (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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