Three Essays on Mortgage Refinancing

Three Essays on Mortgage Refinancing

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The purpose of this dissertation is to investigate mortgage refinancing in the following three categories: refinancing and rate-and-point choice, refinancing and borrowers' mortgage instrument choice, and estimating the market refinancing share of total mortgage origination volume. The choice of rate-and-point combination is driven by a comparison between the borrower's own estimation of his holding period of the mortgage and the implied duration priced into each selection by the lender reflecting estimations of the lender. Questions tested in this setting are: whether the borrower correctly predicts his own holding period of the mortgage and chooses the right rate-and-point combination on his fixed-rate mortgage, and once chosen, whether he treats the upfront points paid as sunk costs and refinances optimally should such opportunity arise. Comparatively, choosing a loan product is a more complex issue than the choice of rate-and-point combination, affected by borrower characteristics including expected income, wealth, housing consumption, and life cycle. Examining borrowers' product choice in a refinance situation provides an in-depth look at their decision-making process, where a comparison can be made concerning changes in borrower characteristics and changes in loan instrument choices between the original loan and the refinance loan. The effects of various factors are tested in turn. Shifting focus from understanding borrower behavior on an individual basis to the macro level, the refinancing share of the total loan originations is also studied. Information from various sources on the refi-share is compared and examined in detail to reconcile the differences among previous estimates of refinancing activity in the market and suggestions are made regarding the correct refinance share estimations.2.5 Conclusion and Future Directions Through a unique dataset that has complete information on transaction costs, points paid, and the subsequent prepayment status of the ... We find that borrowers who are less likely to move or refinance take out mortgage loans with more points. ... Contrary to prior theoretical predictions, we do not find a significant relationship between points and borrower mobility.

Title:Three Essays on Mortgage Refinancing
Author:Yan Chang
Publisher:ProQuest - 2006


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