Mortgage Refinancing and the Concentration of Mortgage Coupons

In 1998, interest rates on mortgages dropped to their lowest levels in nearly five years, prompting a record amount of refinancing activity. Refinancings typically rise following a drop in rates as homeowners seek to capture interest savings. The 1998 surge, however, was strikingly large relative to the size of the interest rate declines that triggered it. From mid-1997 to early 1998, thirty-year mortgage rates fell about 1 percentage point, from just over 8 percent to just over 7 percent. During the same period, refinancing applications increased nearly sevenfold. When rates fell modestly again in the second half of 1998, refinancing soared to even higher levels. Indeed, the increases in refinancing activity were so extraordinary that they caught even some experienced mortgage market participants by surprise.1