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

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, passthrough of monetary policy through household balance sheets, and design of the mortgage market.

Regional Heterogeneity and Monetary Policy

“…While this link from refinancing to car spending is not necessarily causal (we do not have exogenous variation in refinancing propensity at the individual level), it nevertheless supports the view that refinancing in the wake of QE1 did stimulate consumer spending, and more so if the borrower also removed equity in the process. We further note that positive refinancing effects on spending are also found in work exploiting exogenous variation in access to refinancing (Agarwal et al, 2017;Abel and Fuster, 2018) or payment reductions from ARM resets (Di Maggio et al, 2017).…”

“…Specifically, the Home Affordable Modification and Refinance Programs (HAMP and HARP) were announced in March 2009, with the goal of alleviating the collateral friction we study (as we return to in Section 7) but for various reasons (such as limited participation by servicers) had a very slow start. In particular, HARP only started having large effects on refinancing volumes in 2012 (Agarwal et al, 2017), well after our study window. 7 Furthermore, any debt reduction policies around the time of our sample would likely reduce our effects 7 Agarwal et al (2017) show that refinancing spurs spending and that this channel was strengthened by the HARP's reduction of collateral frictions, in line with the mechanism we emphasize.…”

“…To reflect the fact that these policies also explicitly eliminated appraisal and other fees associated with refinancing, we assume that underwater households can refinance without paying the fixed cost under both policies. 33 Existing research has shown that institutional features such as servicer participation and market power matter for the consequences of these policies as actually implemented (Agarwal et al, 2016(Agarwal et al, , 2017. Also, especially with modification programs, which in practice usually focus on delinquent borrowers, moral hazard is an important concern that we do not consider.…”

“…On the empirical front, Fuster and Willen (2010) Agarwal et al (2017), and Abel and Fuster (2018). There is also a growing literature using aggregate VARs to document that responses to monetary policy vary with regional housing markets (Fratantoni and Schuh, 2003) and household debt (Alpanda and Zubairy, 2017).…”

“…The credit record component of the data includes information on each borrower's monthly auto loan balances, and we follow the literature (e.g. Agarwal et al, 2017;Di Maggio, Kermani, and Palmer, 2016) in using large balance increases from one month to the next as a proxy for a car purchase. We then conduct an "event study" where we look at borrowers' propensity to purchase a car in the months around refinancing.…”