Tag Archives: psychiatric

Failure to Refinance

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photo by GotCredit

Benjamin Keys, Devin Pope and Jaren Pope have recently had their Failure to Refinance paper accepted in the Journal of Financial Economics.  A version of the paper can be found on SSRN. This academic paper has a lot of relevance to many a homeowner. The abstract reads,

Households that fail to refinance their mortgage when interest rates decline can lose out on substantial savings. Based on a large random sample of outstanding U.S. mortgages in December of 2010, we estimate that approximately 20% of households for whom refinancing would be optimal and who appeared unconstrained to do so, had not taken advantage of the lower rates. We estimate the present-discounted cost to the median household who fails to refinance to be approximately $11,500, making this a particularly large consumer financial mistake. To shed light on possible mechanisms and corroborate our main findings, we also provide results from a mail campaign targeted at a sample of homeowners that could benefit from refinancing.

 The authors conclude,

Our results suggest the presence of information barriers regarding the potential benefits and costs of refinancing. Expanding and developing partnerships with certified housing counseling agencies to offer more targeted and in-depth workshops and counseling surrounding the refinancing decision is a potential direction for policy to alleviate these barriers for the population most in need of financial education.

In addition, the magnitude of the financial mistakes that households make suggest that psychological factors such as procrastination, trust, and the inability to understand complex decisions are likely barriers to refinancing. One policy that has been suggested to overcome the need for active household participation would require mortgages to have fixed interest rates that adjust downward automatically when rates decline To the extent that it is undesirable to reward only those households that are able to overcome the computational and behavioral barriers of the refinance process, policies such as an automatically-refinancing mortgage may be beneficial. Although an automatically-refinancing mortgage contract would be more expensive up-front for all borrowers in equilibrium, it would remove the cross-subsidization in the current mortgage finance system, where savvier homeowners who use their refinancing option when rates decline are subsidized by those households who fail to do so. (20, citation omitted)

I have heard a number of proposals that call for automatically refinancing mortgages. Such a mortgage product would shake up the mortgage market in its current form and require a transition period to figure out how it should be priced. But the net result would certainly benefit homeowners in the aggregate.

Dog Bites Man: Housing Vouchers Are Good

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The Center for Budget and Policy Priorites has issued a short report, Research Shows Housing Vouchers Reduce Hardship and Provide Platform for Long-Term Gains Among Children. Many housing policy researchers favor housing voucher programs over project-specific housing subsidies, although policymakers consistently favor the latter. So while this report isn’t really news, it is important to that its main points are frequently reiterated:

The Housing Choice Voucher program, the nation’s largest rental assistance program, helps more than 2 million low-income families rent modest units of their choice in the private market. Vouchers sharply reduce homelessness and other hardships, lift more than a million people out of poverty, and give families an opportunity to move to safer, less poor neighborhoods. These effects, in turn, are closely linked to educational, developmental, and health benefits that can improve children’s long-term life chances and reduce costs in other public programs. This analysis reviews research findings on vouchers’ impact on families with children, people with disabilities, and other poor and vulnerable households. (1, footnote omitted)

The report is not as precise as I would have liked. It describes a study of Temporary Assistance for Needy Families-eligible families as a study of “low-income” families. (compare text on page one with text in footnote ii). People eligible for Housing Choice Vouchers and TANF are “very low-income,” which is a meaningfully distinct subset of low-income families.Very low-income families have incomes that do not exceed 50% of the area median income whereas low-income families generally have incomes that do not exceed 80% of the area median income. I would guess that the findings about the very low-income subset would not directly apply to the bigger set of low-income families.

With that caveat in mind, here are the report’s main findings about Housing Choice Vouchers. They

  • Reduced the share of families that lived in shelters or on the streets by three-fourths, from 13 percent to 3 percent.
  • Reduced the share of families that lacked a home of their own — a broader group that includes those doubled up with friends and family in addition to those in shelters or on the streets — by close to 80 percent, from 45 percent to 9 percent.
  • Reduced the share of families living in crowded conditions by more than half, from 46 percent to 22 percent.
  • Reduced the number of times that families moved over a five-year period, on average, by close to 40 percent. (1)

These are big effects. Policymakers, pay attention!