7  According to data from the Home Mortgage Disclosure Act, there were 31.8 million refinancings of first-lien single-family mortgages over 2008–2013, with an average (median) loan amount of $ $  8  For evidence on the importance of capacity constraints for time-varying margins in mortgage pricing, see Fuster, Goodman, Lucca, Madar, Molloy and Willen, 2012, The Rising Gap between Primary and Secondary Mortgage Rates, Federal Reserve Bank of New York Economic Policy Review, 19(2), pp. 17–39. 9  This is documented for instance in another paper presented yesterday, by Andersen, Campbell, Meisner, Nielsen and Ramadorai (2015), “Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market”. 10  For evidence that lenders are less willing to originate FRMs if mortgage securitization markets are illiquid or frozen, see Fuster and Vickery (2015), “Securitization and the Fixed-Rate Mortgage”, Review of Financial Studies, 28(1), pp. 176-211. Research presented in yesterday’s academic sessions finds that a bank’s access to external bond finance influences the composition of mortgages it originates: see Foá, Gambacorta, Guiso and Mistrulli (2015), The Supply Side of Mortgage Finance. 11  One proposal for such innovation that would have increased pass-through during the crisis is the “automatic stabilizer mortgage” of Eberly and Krishnamurthy, 2014; see http://www.newyorkfed.org/research/conference/2015/mortgage_design/Eberly_Janice_052015.pdf. BIS central bankers’ speeches  3  foreclosures, and associated credit losses. But a number of proposals have argued that mortgage balances should be explicitly indexed to movements in home prices in some way. 12 I hope I have whetted your appetite for today’s events.
A risk-sharing argument may call for the effects of monetary policy to be more evenly spread across households. On the other hand, monetary policy might have to adjust interest rates more dramatically in a world of widespread FRMs, which would affect some potential borrowers a great deal. Furthermore, FRMs require an extensive financial-sector risk transfer system 10, which may be costly, and may concentrate risks in systemically risky ways. Thus, there are clearly many tradeoffs that need to be carefully considered. Moreover, as academic research has emphasized, optimal mortgage choice depends on a borrower’s characteristics and financial circumstances. It therefore seems desirable that the mortgage finance system makes a range of different contracts available to borrowers, and be open to sensible innovations in contract design. 11 Although I have focused on ARMs, interest rate adjustability is only one of many important aspects of mortgage design that will be considered in the discussions today. Another important issue, for example, is how home price movements are shared between the borrower and lender. Home price risk is already partially borne by lenders and other mortgage investors, since a fall in home prices increases mortgage defaults and  6  See Agarwal, Driscoll and Laibson, 2013, “Optimal Mortgage Refinancing: A Closed-Form Solution”, Journal of Money, Credit and Banking, Vol. 45, No. 4, pp. 591–622.