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

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