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

72 Pages Posted: 21 Sep 2015 Last revised: 29 Oct 2017

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Gene Amromin

Federal Reserve Bank of Chicago

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Tim Landvoigt

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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 2017

Abstract

Using proprietary loan-level data, 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 relaxed housing equity constraints by extending government credit guarantee on insufficiently collateralized mortgages refinanced by intermediaries. Difference-in-difference tests based on program eligibility criteria reveal a significant increase in refinancing activity by HARP. More than three million eligible borrowers with primarily fixed-rate mortgages refinanced under HARP, receiving an average reduction of 1.4% in interest rate that amounts to $3,500 in annual savings. Durable spending by borrowers increased significantly 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 suggest that competitive frictions in the refinancing market partly hampered the program’s impact: the take-up rate was reduced by 10% to 20% and annual savings lower by $400 to $800 among those who refinanced. These effects were amplified for the most indebted borrowers, the key target of the program. A life-cycle model of refinancing quantitatively rationalizes these patterns and produces significant welfare gains from altering the refinancing market by removing the housing equity eligibility constraint, like HARP did, and by lowering competitive frictions. Our work has 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 Landvoigt, Tim and Piskorski, Tomasz and Seru, Amit and Yao, Vincent W., Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program (October 2017). 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

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (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)

Tim Landvoigt

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tomasz Piskorski

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

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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