Inattentive Households, Mortgage Redistribution, and Inequality

There are large cross-sectional differences in how often US households choose to refinance their mortgage. Many of these choices appear to be sub-optimal, with households often losing out on thousands of dollars of potential savings. In this paper, we develop an equilibrium mortgage pricing model that allows us to explore the consequences of this heterogeneity in a pooling equilibrium, such as in the US conforming mortgage market. A key result is that because of the large cross-sectional differences in refinancing propensity, there are substantial cross-subsidies from “inattentive” to “attentive” households. We use the model to analyze policies to potentially address this redistribution, such as increasing attentiveness and mortgage contract design, and highlight the potential unintended consequences increasing attentiveness. Lastly, we discuss anovel channel to wealth inequality coming from the liability side of a household’s balance sheet.