Mortgage Reﬁnancing Activity: An Explanation
Jill L. Wetmore
Springer Science + Business Media, LLC 2006
Abstract Mortgage reﬁnancing activity reached unprecedented high levels during
1990–2001. Using GARCH to control for heteroskedasticity and separating the data
into regimes to control for potential structural changes over time, we estimate a
model explaining changes in mortgage reﬁnancing activity over the period studied.
We ﬁnd changes in reﬁnancing activity to be negatively related to current as well as
past changes in the 30-year mortgage rate with a declining signiﬁcant lag over time.
Similarly, there is a signiﬁcant lagged dependent variable with a declining lag.
Moreover, mortgage reﬁnancing activity is a substitute for other investments during
certain regimes. These results offer evidence that home owners cash out the
mortgage for other investments. The lags suggest that the process is delayed for a
variety of reasons. The declining lag signals a faster response by consumers. The
reasons for a faster response include a consumer perception that interest rates have
Bbottomed out,’’ the presence of an increase in consumer sophistication, and
improvements in technology and market coordination that facilitate and reduce the
cost of the reﬁnancing process.
Home mortgage reﬁnancing activity has grown to unprecedented levels during the
years 1990–2001 and is an important economic activity. Individuals have been
known to reﬁnance their mortgages repeatedly over a short time! Since this activity
is so important to the economy, the ability to forecast it is of interest to managers of
lending institutions and the literature.
J Real Estate Finan Econ (2006) 33: 75–86
J. L. Wetmore (*)
Saginaw Valley State University,
317 Curtiss Hall, University Center, MI 48710, USA
Eastern Connecticut State University,
83 Windham Street, Wilimantic, CT 06226, USA