reached a large number of borrowers, their implementation was complex. as a simple mortgage design counterfactual, had more borrowers had adjustable - rate mortgages, which are generally indexed to short - term interest rates, the pass - through of lower market interest rates would have been more direct. as the chart illustrates, the average interest rate on outstanding arms declined more rapidly than the rate on frms, even though in the u. s. most arms only adjust after a rather long fixed - rate period ( often 5 or more years ) and then only do so infrequently ( generally once or twice a year ). crucially, arm interest rate resets reduced mortgage payments without requiring the borrower to refinance, thereby benefiting a broad range of borrowers, including those with little or no home equity and / or low credit scores. research conducted here at the new york fed has shown that these lower interest payments resulted in large declines in these borrowers ’ default probabilities 3. and two papers presented in our academic sessions yesterday found evidence that these borrowers responded by increasing their consumption of durable goods 4. all this implies that a higher share of arms at the start of the financial crisis would likely have enhanced the effectiveness of monetary easing in reducing foreclosures and stimulating the macroeconomy. more generally, the pass - through of monetary policy is likely to be stronger if a high share of mortgage debt has an adjustable interest rate, both in easing and tightening phases of the economic cycle. 5 as a result, the amplitude of interest rate adjustments by the central bank may not need to be quite as large to have the same economic effect. this may be a particularly important consideration when the economy is at or close to the zero - lower bound on interest rates, as the u. s. and many other economies are today. see tracy and wright, 2012, payment changed and default risk : the impact of refinancing on expected credit losses, federal reserve bank of new york staff report no. 562 ; and fuster and willen, 2012, payment size, negative equity, and mortgage default federal reserve bank of new york staff report no. 582. see keys, piskorski, seru and yao, 2015, mortgage rates, household balance sheets, and the real economy, and di maggio, kermani and ramcharan, 2015, monetary pass - through : household consumption and voluntary deleveraging. this is also

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 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. 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 $ 212, 000 ( $ 174, 000 ). 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. 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 ”. 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 foa, gambacorta, guiso and mistrulli ( 2015 ), the supply side of mortgage finance. 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 foreclosures, and associated credit losses. but a number of proposals have argued that mortgage balances should be explicitly indexed to movements in