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

Sumit Agarwal, National University of Singapore, Gene Amromin, Federal Reserve Bank of Chicago, Souphala Chomsisengphet, Office of Comptroller and Currency, Tim Landvoigt, Wharton School of Business, Tomasz Piskorski, Columbia Graduate School of Business, Amit Seru, Stanford Graduate School of Business and Hoover Institution and Vincent Yao, Georgia State University

We examine the ability of the government to impact mortgage refinancing activity and spur consumption by focusing on the Home Affordable Refinance Program (HARP) that relaxed housing equity constraints by extending government credit guarantee on insufficiently collateralized refinanced mortgages. 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 1.45% in interest rate ($3,000 in annual savings). Durable spending by borrowers increased significantly after refinancing. 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. Competitive frictions in the refinancing market hampered the program’s impact: the take-up rate and annual savings among those who refinanced were reduced by 10% to 20%, with amplified effects for the most indebted borrowers.