Systemic risk and the refinancing ratchet effect
The combination of rising home prices, declining interest rates, and near-frictionless refinancing opportunities can create unintentional synchronization of homeowner leverage, leading to a “ratchet” effect on leverage because homes are indivisible and owner-occupants cannot raise equity to reduce l...
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| Format: | Article |
| Language: | en_US |
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Elsevier
2017
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| Online Access: | http://hdl.handle.net/1721.1/108638 https://orcid.org/0000-0003-2944-7773 https://orcid.org/0000-0003-1133-2484 |
| _version_ | 1811076223445499904 |
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| author | Khandani, Amir E. Lo, Andrew W Merton, Robert |
| author2 | Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science |
| author_facet | Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science Khandani, Amir E. Lo, Andrew W Merton, Robert |
| author_sort | Khandani, Amir E. |
| collection | MIT |
| description | The combination of rising home prices, declining interest rates, and near-frictionless refinancing opportunities can create unintentional synchronization of homeowner leverage, leading to a “ratchet” effect on leverage because homes are indivisible and owner-occupants cannot raise equity to reduce leverage when home prices fall. Our simulation of the U.S. housing market yields potential losses of $1.7 trillion from June 2006 to December 2008 with cash-out refinancing vs. only $330 billion in the absence of cash-out refinancing. The refinancing ratchet effect is a new type of systemic risk in the financial system and does not rely on any dysfunctional behaviors. |
| first_indexed | 2024-09-23T10:18:14Z |
| format | Article |
| id | mit-1721.1/108638 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T10:18:14Z |
| publishDate | 2017 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | mit-1721.1/1086382022-09-26T17:06:10Z Systemic risk and the refinancing ratchet effect Khandani, Amir E. Lo, Andrew W Merton, Robert Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science Sloan School of Management Sloan School of Management. Laboratory for Financial Engineering Lo, Andrew W Merton, Robert The combination of rising home prices, declining interest rates, and near-frictionless refinancing opportunities can create unintentional synchronization of homeowner leverage, leading to a “ratchet” effect on leverage because homes are indivisible and owner-occupants cannot raise equity to reduce leverage when home prices fall. Our simulation of the U.S. housing market yields potential losses of $1.7 trillion from June 2006 to December 2008 with cash-out refinancing vs. only $330 billion in the absence of cash-out refinancing. The refinancing ratchet effect is a new type of systemic risk in the financial system and does not rely on any dysfunctional behaviors. 2017-05-03T15:55:02Z 2017-05-03T15:55:02Z 2012-11 2012-05 Article http://purl.org/eprint/type/JournalArticle 0304-405X 1879-2774 http://hdl.handle.net/1721.1/108638 Khandani, Amir E.; Lo, Andrew W. and Merton, Robert C. “Systemic Risk and the Refinancing Ratchet Effect.” Journal of Financial Economics 108, no. 1 (April 2013): 29–45. © 2012 Elsevier B.V. https://orcid.org/0000-0003-2944-7773 https://orcid.org/0000-0003-1133-2484 en_US http://dx.doi.org/10.1016/j.jfineco.2012.10.007 Journal of Financial Economics Creative Commons Attribution-NonCommercial-NoDerivs License http://creativecommons.org/licenses/by-nc-nd/4.0/ application/pdf Elsevier SSRN |
| spellingShingle | Khandani, Amir E. Lo, Andrew W Merton, Robert Systemic risk and the refinancing ratchet effect |
| title | Systemic risk and the refinancing ratchet effect |
| title_full | Systemic risk and the refinancing ratchet effect |
| title_fullStr | Systemic risk and the refinancing ratchet effect |
| title_full_unstemmed | Systemic risk and the refinancing ratchet effect |
| title_short | Systemic risk and the refinancing ratchet effect |
| title_sort | systemic risk and the refinancing ratchet effect |
| url | http://hdl.handle.net/1721.1/108638 https://orcid.org/0000-0003-2944-7773 https://orcid.org/0000-0003-1133-2484 |
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