Mortgage Refinancing and the Concentration of Mortgage Coupons

changes the flow of wealth between households, financial intermediaries ….. ING, the dramatic increase in mortgage refinancing in 1998. Refinancing a fixed rate mortgage ….

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Mortgage refinancing alters the flow of wealth among households, financial intermediaries, and investors and can have both positive and negative implications for the economy. Homeowners clearly benefit: by refinancing their mortgages at a lower rate, they often realize substantial savings.

Offsetting these benefits, however, are the costs to mortgage lenders. When a large number of borrowers refinance, banks and thrifts that own mortgages and investors in mortgage-backed securities such as mutual funds will see a decline in investment yields.

What accounts for the unexpected strength of mortgage refinancing activity in 1998? At the end of 1997, a very large proportion of existing mortgages many of which had been originated within the past five years had rates slightly above market rates. As interest rates fell in 1997 and 1998, the spread between the rates on these existing mortgages and the rates available on new mortgages widened to the point where refinancing became

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