Homeowning Hamlets

The market is distorted

IN A world of fully rational human beings, people would all be constantly checking the financial markets for profitable opportunities. But often they ignore a chance to save money even when it is right under their noses.

That conclusion is clear from a new study of the Danish mortgage market.* Danish homeowners tend to use fixed-rate mortgages, which they can refinance at any time without penalty. This refinancing can occur even when borrowers are in negative equity (meaning that they owe more than their house is worth) or when their creditworthiness has deteriorated; restrictions only apply when the homeowner tries to increase the size of the loan.

As rates on long-term mortgages fell from more than 7% to around 4% in the aftermath of the financial crisis, some Danes were quick to refinance loans taken out at higher interest rates. The academics dub these people “levelheads”—the kind of rational agents beloved by economic models. But a second group, nicknamed “woodheads”, were slow to refinance, either because they were not paying attention or because of inertia (they could not...

via The Economist: Finance and economics Business Feeds

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