Kian Samaee (Penn), "Inaction, Search Costs, and Market Power in the US Mortgage Market"

Kian Samaee (Penn)
Date: January 28, 2020
Time and Location: 10:00 a.m., Leacock 429

Abstract:
Many US mortgage borrowers do not refinance, despite seemingly having financial incentives to do so. We explore the role of search costs in explaining this inaction, focusing on the 2009-2015 period when mortgage rates declined significantly. We estimate a (dynamic) discrete choice model of refinancing and search decisions using a proprietary panel data set, which includes information on the sequence of refinancing decisions and search intensity (the number of mortgage inquiries). We find that search costs significantly inhibit refinancing through two channels. First, higher search costs directly increase the cost of refinancing. Second, they also indirectly increase loan originators’ market power and thus raise the offered refinance rates. We find that the indirect market power effect dominates. We use our model to study an alternative market design, in which a centralized refinance market replaces the current decentralized one. We find, under specific assumptions, a centralized refinance market can significantly increase refinancing activities by eliminating market power, even if we keep the refinancing costs unchanged.