Did Home Refinancing Boom Trigger the Financial Crisis?
The residential housing market can burn down even when bankers restrain their lending, financial regulators dutifully police their beats and government officials tweak the right monetary dials. That’s the conclusion of an interesting new study by economists including Nobel laureate Robert Merton of Harvard and Andrew Lo of the MIT Sloan School of Management. Under certain conditions, all it takes to fan the flames is for a critical mass of people to extract money from their homes in the form of home equity loans, sales and “cash-out” refinancing. When that happens, the interplay of rampant mortgage refinancing, falling interest rates and rising home prices becomes a dangerous feedback loop. Each of these three trends is systemically neutral or positive when…
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