Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty

Mortgage refinancing activity associated with extraction of home equity contains a strongly counter-cyclical component consistent with household demand for liquidity. We estimate a structural model of liquidity management featuring counter-cyclical idiosyncratic labor income uncertainty, both long-term and short-term mortgages, and realistic borrowing constraints. We then empirically evaluate its predictions for the households' choices of leverage, liquid assets, and mortgage refinancing using micro-level data. Taking the observed historical paths of house prices, aggregate income, and interest rates as given, the model quantitatively accounts for many salient features in the evolution of balance sheets and consumption in the cross section of households over the 2001-2012 period