Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

Abstract

How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimuli. (JEL E32, E43, E52, E58, G21, G51)

State-Dependent Effects of Monetary Policy: The Refinancing Channel

“…Our empirical results are closely related to contemporaneous, independent work by Berger, Milbradt, Tourre, and Vavra (2018). We view their work as complementary to ours.…”

“…https://www.federalreserve.gov/pubs/refinancings 15 See Diaz and Luengo-Prado (2012),Berger et al (2018), and Zillow's home guide (2018) at https://www.zillow.com/sellers-guide/closing-costs-for-sellers.…”

How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic

“…The evidence in this paper adds to a large body of research about the transmission of monetary policy and interest rate shocks through the mortgage market and the role of financial frictions, including Berger et al (2020), Di Maggio et al (2017, Fuster et al (2013), ; see Amromin et al (2020) for a recent review. Our results are also related to research on the growing presence of nonbank mortgage intermediaries, which now originate more than half of new loans and are more sensitive to liquidity risk (Kim et al, 2018;Jiang et al, 2020;Buchak et al, 2018).…”

Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result

“…First, the analysis is motivated by the recent experience of limits to conventional monetary policy space, caused in particular by: a binding ELB on nominal rates due to arbitrage between bonds and money; adverse effects of further rate cuts on bank profitability (Brunnermeier & Koby, 2018); rates on most outstanding mortgages being close to the ELB (Berger et al, 2018); and durables spending adjustments already having been pulled forward in time (McKay & Wieland, 2019). I blend theory and empirical evidence to show how a conventional policy instrument -lump-sum stimulus payments -can overcome those limits.…”