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posted on 15 February 2016

Mortgage Refinancing During The Great Recession: The Role Of Credit Scores

from the Chicago Fed

-- this post authored by Gene Amromin, Benjamin J. Keys, and Michael J. Murto

This article examines whether deteriorating credit scores may have posed a barrier to mortgage refinancing during the Great Recession of 2008 - 09 and its immediate aftermath. The authors find that in general, as long as borrowers kept up with their mortgage payments, their credit scores did not fall significantly over this period. Hence, credit scores are not likely to explain why certain borrowers with sufficient home equity did not refinance their mortgages.

For much of the decade preceding the Great Recession, the U.S. mortgage refinancing market ran like a well-oiled machine. But the deep and long downturn dramatically altered this market. Many households had taken advantage of opportunities to extract equity (in the form of cash-out refinancing and home equity loans) during the housing boom, and the severe declines in home prices during the recession left them with little or no equity in their homes.

Mounting job losses further impaired households' access to refinancing, as lenders were unable to underwrite new mortgages in the absence of a documented stream of income. Job losses also damaged households' ability to service their existing debt obligations. The resulting mortgage payment delinquencies adversely affected borrowers' credit scores - in some cases pushing them below credit qualification thresholds.

These developments presented a potential hurdle for the effective conduct of monetary policy. Because refinancing represents the easiest way for borrowers with fixed-rate mortgages to take advantage of declines in market interest rates, it is considered one of the primary channels for the transmission of accommodative monetary policy actions. When this refinancing channel is blocked - whether because of erosion in borrower credit quality, falling collateral values, or shrinkage in the supply of credit - lower interest rates provide less stimulus to household consumption.

[click on image below to continue reading]

Source: http://app.frbcommunications.org/e/er?s=1064&lid=3833 &elq=785c549fde93414487ec77f01b651759 &elqaid=10000 &elqat=1 &elqTrackId=c2bbfcbd124948f4a299404be659aedf

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