No Job, No Money, No Refi: Frictions to Refinancing in a Recession
Frictions that prevent households from refinancing their mortgages during times of economic distress can significantly inhibit policy efforts aimed at curtailing the costs of recessions. In this paper, we study two important and counter-cyclical refinancing frictions: the need to document employment and the need to pay upfront closing costs. To quantify the effect of these frictions on refinancing, we exploit a sharp policy change introduced by the Federal Housing Administration (FHA) during the height of the Great Recession that eliminated the ability for unemployed borrowers to refinance and increased the out-of-pocket closing costs for many others. We find that this policy change had very large effects on FHA borrowers; it led to a reduction in the monthly probability of refinancing of about 0.7 percentage points, which is more than 50 percent of the pre-shock average. This reduction in refinancing is concentrated among borrowers likely to be unemployed and among those newly required to pay for closing costs out-of-pocket. Taken together, our results imply a high latent demand for refinancing among the unemployed and underscore the importance of liquidity constraints as a potential barrier to credit access.