Structural Change in the Mortgage Market and the Propensity to Refinance

31 Pages Posted: 19 Oct 2006

See all articles by Paul B. Bennett

Paul B. Bennett

Fordham University Business School

Richard W. Peach

Federal Reserve Bank of New York

Stavros Peristiani

Federal Reserve Bank of New York--Retired

Date Written: September 1998

Abstract

We hypothesize that the intrinsic benefit required to trigger a refinancing has become smaller due to a combination of technological, regulatory, and structural changes that have made mortgage origination more competitive and more efficient. To test this hypothesis, we estimate an empirical hazard model of loan survival for two subperiods, using a database that allows us to carefully control for homeowners' credit ratings, equity, loan size, and measurable transaction costs. Our findings strongly confirm that credit ratings and home equity have significant effects on the refinancing probability. In addition, we provide evidence that homeowners postpone refinancing in the face of increased interest rate volatility, consistent with option value theory. Finally, our results clearly support the hypothesis that structural change in the mortgage market has increased homeowners' propensity to refinance.

JEL Classification: G21, C41, R20

Suggested Citation

Bennett, Paul B. and Peach, Richard W. and Peristiani, Stavros, Structural Change in the Mortgage Market and the Propensity to Refinance (September 1998). FRB of New York Staff Report No. 45, Available at SSRN: https://ssrn.com/abstract=938793 or http://dx.doi.org/10.2139/ssrn.938793

Paul B. Bennett

Fordham University Business School ( email )

1790 Broadway
New York
New York, NY 10019
United States
917 434 0226 (Phone)

HOME PAGE: http://business.fordham.edu/faculty/bennett

Richard W. Peach (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Stavros Peristiani

Federal Reserve Bank of New York--Retired ( email )

3001 Henry Hudson Pkwy W
Apartment 1C
Bronx, NY New York 10463
United States
718-796-5190 (Phone)

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