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On Thursday, May 4, John Campbell joined Markus’ Academy for a lecture on Mortgage Choice and Monetary Policy. Campbell is the Morton L. and Carole S. Olshan Professor of Economics at Harvard University, where he has taught since 1994.

Watch the full presentation below. You can watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.


[0:00] Introduction

[6:35] A prosecution case against the U.S. mortgage system 

[12:59] 1. The U.S. mortgage system is a weak monetary transmission channel

[23:44] 2. Refinancing worsens inequality

[39:41] 3. FRMs can lead to financial instability

[48:10] 4. FRMs can lead to lock-in effects.

[54:19] What do people prefer? FRMs or ARMs? 

[58:20] Policy suggestions


  • Mortgages are the largest household liability, and mortgage rates are one of the main channels through which monetary policy affects the economy
  • In this talk Prof. Campbell laid out “The Prosecution Case Against the U.S. Mortgage System”. The traditional US fixed-rate system does not deserve the strong political support it has received.
  • He argues the system has four main problems: (1) it provides a weak monetary policy transmission mechanism, (2) it worsens inequality, (3) it destabilizes the financial system, and (4) it reduces housing market liquidity and labor mobility
  • The main policy takeaway is that we should move towards adjustable-rate mortgages (or automatic refinancing). We should also formalize forbearance, reform the way we finance transaction costs (“points”) and consider innovative designs such as indexing the principal to inflation or to home values
  • Download the full summary