Crowding Out Effects of Refinancing on New Purchase Mortgages

FEDS Working Paper No. 2015-017

http://dx.doi.org/10.17016/FEDS.2015.017

46 Pages Posted: 21 Apr 2015

See all articles by Steven A. Sharpe

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Shane M. Sherlund

Federal Reserve Board of Governors

Date Written: March 2, 2015

Abstract

We present evidence that binding mortgage processing capacity constraints reduce mortgage originations to borrowers of low to modest credit quality. Mortgage processing capacity constraints typically bind when the demand for mortgage refinancing shifts outward, usually because of lower mortgage rates. As a result, high capacity utilization leads mortgage lenders to ration mortgage credit, completing mortgages that require less underwriting resources, and are thus less costly, to produce. This is hypothesized to have a particularly adverse impact on the ability of low- to modest-credit-quality borrowers to obtain mortgages. What is more, we show that, by lowering capacity utilization, a rise in interest rates can, under certain circumstances, induce an increase in mortgage originations to borrowers of low to modest credit quality. In particular, we find fairly large effects for purchasing borrowers of modest credit quality, in which we find that a decrease in capacity utilization of 4 applications per mortgage employee (similar to that observed from 2012 to 2013) could result in increased purchase mortgage originations, as the relaxed capacity constraint at least partially offsets the higher cost of mortgage credit.

Keywords: Mortgages and credit, capacity constraint, refinancing

JEL Classification: G21

Suggested Citation

Sharpe, Steven A. and Sherlund, Shane M., Crowding Out Effects of Refinancing on New Purchase Mortgages (March 2, 2015). http://dx.doi.org/10.17016/FEDS.2015.017. Available at SSRN: https://ssrn.com/abstract=2596587 or http://dx.doi.org/10.2139/ssrn.2596587

Steven A. Sharpe

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

Shane M. Sherlund (Contact Author)

Federal Reserve Board of Governors ( email )

20th and C Streets, NW
Mailstop 93
Washington, DC 20551
United States
202-452-3589 (Phone)
202-728-5887 (Fax)

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