NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Collateral Damage: How Refinancing Constraints Exacerbate Regional Recessions

Andrew Caplin, Charles Freeman, Joseph Tracy

NBER Working Paper No. 4531
Issued in November 1993
NBER Program(s):   EFG

In the current structure of the U.S. residential mortgage market, a fall in property values may make it very difficult for homeowners to refinance their mortgages to take advantage of falling interest rates. In this paper, we explain the institutional background for this effect and quantify its importance. We confirm that this form of collateral constraint has greatly reduced recent refinancing in states with depressed property markets. We also point to the many ways in which the reduction in refinancing may have inflicted additional damage in these already recession-hit states. Finally, we show that relatively minor institutional changes could have neutralized the damaging effects of the collateral constraints, and we discuss why the institutions have their current structure.

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Document Object Identifier (DOI): 10.3386/w4531

Published: Journal of Money, Credit, and Banking, Vol.29, no.4, part 1 (November 1997), pp. 496-516.

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