Three Essays on Mortgage Refinancing

Author:

Chang, Yan

Graduate Program:

Business Administration

Degree:

Doctor of Philosophy

Document Type:

Dissertation

Date of Defense:

March 13, 2006

Committee Members:

Abdullah Yavas, Committee Chair/Co-Chair
Austin Jay Jaffe, Committee Member
Kenneth Michael Lusht, Committee Member
N Edward Coulson, Committee Member

Keywords:

mortgage
refinance
borrower rationality
product choice
mortgage points

Abstract:

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.