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Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program

61 Pages Posted: 21 Sep 2015 Last revised: 3 Nov 2015

Sumit Agarwal

Georgetown University - Department of Finance

Gene Amromin

Federal Reserve Bank of Chicago

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Tomasz Piskorski

Columbia Business School - Finance and Economics

Amit Seru

Stanford University

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

We examine the ability of the government to impact mortgage refinancing activity and spur consumption by focusing on the Home Affordable Refinancing Program (HARP). The policy allowed intermediaries to refinance insufficiently collateralized mortgages by extending government credit guarantee on such loans. We use proprietary loan-level panel data from a large market participant with refinancing history and social security number matched consumer credit records of each borrower. A difference-in-difference empirical design based on eligibility requirements of the program reveals a substantial increase in refinancing activity by the program: more than three million eligible borrowers with primarily fixed-rate mortgages – the predominant contract type in the U.S. – refinanced their loans under HARP. Borrowers received a reduction of around 140 basis points in interest rate, on average, due to HARP refinancing, amounting to about $3,500 in annual savings per borrower. There was a significant increase in the durable spending by borrowers after refinancing, with larger increase among more indebted borrowers. Regions more exposed to the program saw a relative increase in non-durable and durable consumer spending, a decline in foreclosure rates, and faster recovery in house prices. A variety of identification strategies reveal that competitive frictions in the refinancing market may have partly hampered the program’s impact. On average, these frictions reduced take-up rate among eligible borrowers by 10%-20% and cut interest rate savings by 16-33 basis points, with larger effects among the most indebted borrowers who were the key target of the program. These findings have implications for future policy interventions, pass-through of monetary policy through household balance sheets, and design of the mortgage market.

Keywords: Financial Crisis, HARP, Debt, Refinancing, Consumption, Spending, Household Finance, Mortgages, Policy Intervention

JEL Classification: E65, G18, G21, H3, L85

Suggested Citation

Agarwal, Sumit and Amromin, Gene and Chomsisengphet, Souphala and Piskorski, Tomasz and Seru, Amit and Yao, Vincent W., Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program (October 2015). Columbia Business School Research Paper No. 15-85; Kreisman Working Papers Series in Housing Law and Policy No. 27. Available at SSRN: https://ssrn.com/abstract=2662906 or http://dx.doi.org/10.2139/ssrn.2662906

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Gene Amromin

Federal Reserve Bank of Chicago ( email )

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

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Tomasz Piskorski

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

650 Knight Management
Stanford, CA 94305
United States

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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