Houses as Atms? Mortgage Refinancing and Macroeconomic Uncertainty

76 Pages Posted: 20 Sep 2013 Last revised: 21 Apr 2016

See all articles by Hui Chen

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 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.

Suggested Citation

Chen, Hui and Michaux, Michael and Roussanov, Nikolai L., Houses as Atms? Mortgage Refinancing and Macroeconomic Uncertainty (September 2013). NBER Working Paper No. w19421. Available at SSRN: https://ssrn.com/abstract=2328486

Hui Chen (Contact Author)

Massachusetts Institute of Technology ( email )

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National Bureau of Economic Research (NBER) ( email )

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Michael Michaux

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

Marshall School of Business, FBE
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HOME PAGE: http://www-bcf.usc.edu/~michaux/

Nikolai L. Roussanov

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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