Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions

38 Pages Posted: 29 Dec 2006 Last revised: 2 Jan 2007

See all articles by Andrew Caplin

Andrew Caplin

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Charles Freeman

Leonard N. Stern School of Business - Department of Economics

Joseph S. Tracy

National Bureau of Economic Research (NBER); Federal Reserve Bank of Dallas

Date Written: November 1993

Abstract

In the current structure of the U.S. residential mortgage market, a fall in property values may make it very difficult for homeowners to refinance their mortgages to take advantage of falling interest rates. In this paper, we explain the institutional background for this effect and quantify its importance. We confirm that this form of collateral constraint has greatly reduced recent refinancing in states with depressed property markets. We also point to the many ways in which the reduction in refinancing may have inflicted additional damage in these already recession-hit states. Finally, we show that relatively minor institutional changes could have neutralized the damaging effects of the collateral constraints, and we discuss why the institutions have their current structure.

Suggested Citation

Caplin, Andrew and Freeman, Charles and Tracy, Joseph, Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions (November 1993). NBER Working Paper No. w4531, Available at SSRN: https://ssrn.com/abstract=484029

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National Bureau of Economic Research (NBER)

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Charles Freeman

Leonard N. Stern School of Business - Department of Economics

269 Mercer Street
New York, NY 10003
United States

Joseph Tracy

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Federal Reserve Bank of Dallas ( email )

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Dallas, TX 75265-5906
United States

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