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

Anthony A. Defusco; John Alexander Nelson Mondragon

doi:10.1111/jofi.12952

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

Anthony A. Defusco^*, John Alexander Nelson Mondragon

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

23 Scopus citations

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 a Federal Housing Administration 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.

Original language	English (US)
Pages (from-to)	2327-2376
Number of pages	50
Journal	Journal of Finance
Volume	75
Issue number	5
DOIs	https://doi.org/10.1111/jofi.12952
State	Published - Oct 1 2020

Funding

Anthony A. DeFusco and John Mondragon are with the Kellogg School of Management at Northwestern University. We thank seminar participants at the Bank of England, BYU, the Central Bank of Ireland, Stanford, UC Berkeley, NYU, HUD, ITAM, LSE, the Federal Reserve Board, the Federal Reserve Bank of Philadelphia, and the Federal Reserve Bank of San Francisco; as well as conference participants at the NBER Monetary Economics meeting, SITE Financial Regulation session, NYU Household Finance Conference, SED, the New York Fed Conference on Developments in Empirical Macroeconomics, the University of Washington Summer Finance Conference, the Texas Finance Festival, the Pre‐WFA Real Estate Conference, the UW Madison Conference on Real Estate, and the AREUEA National Conference, for comments and suggestions. We are especially grateful to our discussants Hamilton Fout, Andra Ghent, Tim McQuade, and Wenlen Qian. Finally, we would like to thank Brent Ambrose, George Baker, and Brian Chappelle for very helpful conversations regarding institutional details of the FHA and the Streamline Refinance Program. The authors gratefully acknowledge financial support from the Guthrie Center for Real Estate Research at Northwestern University. Both authors have read disclosure policy and have no conflicts of interest to disclose. The Journal of Finance

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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10.1111/jofi.12952

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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 a Federal Housing Administration 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.",

author = "Defusco, {Anthony A.} and {Nelson Mondragon}, {John Alexander}",

note = "Funding Information: Anthony A. DeFusco and John Mondragon are with the Kellogg School of Management at Northwestern University. We thank seminar participants at the Bank of England, BYU, the Central Bank of Ireland, Stanford, UC Berkeley, NYU, HUD, ITAM, LSE, the Federal Reserve Board, the Federal Reserve Bank of Philadelphia, and the Federal Reserve Bank of San Francisco; as well as conference participants at the NBER Monetary Economics meeting, SITE Financial Regulation session, NYU Household Finance Conference, SED, the New York Fed Conference on Developments in Empirical Macroeconomics, the University of Washington Summer Finance Conference, the Texas Finance Festival, the Pre‐WFA Real Estate Conference, the UW Madison Conference on Real Estate, and the AREUEA National Conference, for comments and suggestions. We are especially grateful to our discussants Hamilton Fout, Andra Ghent, Tim McQuade, and Wenlen Qian. Finally, we would like to thank Brent Ambrose, George Baker, and Brian Chappelle for very helpful conversations regarding institutional details of the FHA and the Streamline Refinance Program. The authors gratefully acknowledge financial support from the Guthrie Center for Real Estate Research at Northwestern University. Both authors have read disclosure policy and have no conflicts of interest to disclose. The Journal of Finance Publisher Copyright: {\textcopyright} 2020 the American Finance Association",

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N2 - 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 a Federal Housing Administration 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.

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

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