Crowding Out Effects of Refinancing on New Purchase Mortgages

We present evidence that binding mortgage processing capacity constraints reduce mortgage originations to borrowers with low to modest credit scores. Mortgage processing capacity constraints typically bind when the demand for mortgage refinancing shifts outward, usually because of lower mortgage rates. As a result, high capacity utilization leads mortgage lenders to ration mortgage credit, completing mortgages that require less underwriting resources, and are thus less costly, to produce. This is hypothesized to have a particularly adverse impact on relatively higher credit‐risk borrowers’ ability to obtain mortgages. What is more, we show that, by lowering capacity utilization, a rise in interest rates can, under certain circumstances, induce an increase in mortgage originations to relatively higher risk borrowers. In particular, we find fairly large effects for purchasing borrowers with low to modest credit scores, in which we find that a decrease in capacity utilization of 4 applications per mortgage employee (similar to that observed from 2012 to 2013) could result in increased purchase mortgage originations, as the relaxed capacity constraint might have offset any negative effect on mortgage demand from higher interest rates.