Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition

41 Pages Posted: 19 Dec 2014

See all articles by Gene Amromin

Gene Amromin

Federal Reserve Bank of Chicago

Caitlin Kearns

University of California, Berkeley

Date Written: November 30, 2014

Abstract

We explore a policy-induced change in borrower ability to shop for mortgages to investigate whether market competitiveness affects mortgage interest rates. Our paper exploits a discontinuity in the competitive landscape introduced by the Home Affordable Refinancing Program (HARP). Under HARP, lenders that currently service loans eligible for refinancing enjoyed substantial advantages over their potential competitors. Using a fuzzy regression discontinuity design, we show a jump in mortgage interest rates precisely at the HARP eligibility threshold. Our results suggest that limiting competition raised interest rates on 30-year fixed-rate mortgages by 15 to 20 basis points, translating into higher lender profits. The results are distinct from documented effects of consolidation and capacity reduction in mortgage lending and are robust to a number of sample restrictions and estimation choices. We interpret our findings as evidence that increases in pricing power lead to higher interest rates in mortgage markets.

Keywords: mortgage crisis, market competition, pricing power, HARP

JEL Classification: E52, G21

Suggested Citation

Amromin, Gene and Kearns, Caitlin, Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition (November 30, 2014). FRB of Chicago Working Paper No. 2014-25. Available at SSRN: https://ssrn.com/abstract=2539772 or http://dx.doi.org/10.2139/ssrn.2539772

Gene Amromin (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Caitlin Kearns

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

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