Publications
Publications
- 2021
Closing Costs, Refinancing, and Inefficiencies in the Mortgage Market
By: David Hao Zhang
Abstract
In the US, borrowers often finance the price of mortgage origination by agreeing to higher mortgage rates for a given principal amount. I show that for standard fixed-rate, prepayable mortgages this contractual feature has two consequences. First, it leads to increased transfers between borrowers who refinance at different speeds. Second, it creates deadweight losses by incentivizing too much refinancing. Using both reduced form analysis and a structural model of mortgage choice, I show that both effects are large. Average transfers between borrowers increase by over 90%. Borrowers who would otherwise not refinance do so only to receive more transfers, an effect that accounts for around one quarter of all refinancing and generates significant deadweight losses due to administrative resource costs. Alternative contract designs that (i) add origination costs to the loan balance or (ii) make mortgages automatically refinancing can simultaneously reduce transfers and increase total welfare.
Keywords
Citation
Zhang, David Hao. "Closing Costs, Refinancing, and Inefficiencies in the Mortgage Market." Working Paper, November 2021. (Job Market Paper.)