No Job, No Money, No Refi: Frictions to Refinancing in a Recession

44 Pages Posted: 24 Aug 2018

Date Written: August 2018

Abstract

We study how employment documentation requirements and out-of-pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass-through. To study their effects on refinancing, we exploit an FHA policy change that excluded unemployed borrowers from refinancing and increased others’ out-of-pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out-of-pocket costs. Our results imply that unemployed and liquidity-constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy.

Keywords: Mortgage Refinancing, Financial Frictions, Unemployment, Liquidity Constraints, Monetary Policy

JEL Classification: D14, E52, G21, G28, R28, R30

Suggested Citation

DeFusco, Anthony and Mondragon, John, No Job, No Money, No Refi: Frictions to Refinancing in a Recession (August 2018). Available at SSRN: https://ssrn.com/abstract=3231596 or http://dx.doi.org/10.2139/ssrn.3231596

Anthony DeFusco (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

HOME PAGE: http://www.anthonydefusco.com

John Mondragon

Northwestern University ( email )

Evanston, IL 60208
United States

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