Refinancing Frictions, Mortgage Pricing and Redistribution

There are large cross-sectional differences in how often US borrowers refinance mortgages. In this paper, we develop an equilibrium mortgage pricing model with heterogeneous borrowers and use it to show that equilibrium forces imply important cross-subsidies from borrowers who rarely refinance to those who refinance often. Mortgage reforms can potentially reduce these regressive cross-subsidies, but the equilibrium effects of these reforms can also have important distributional consequences. For example, many policies that lead to more frequent refinancing also increase equilibrium mortgage rates and thus reduce residential mortgage credit access for a large number of borrowers.