VoxEU Column Financial Regulation and Banking

‘Home Affordable Refinancing Program’: Impact on borrowers

Mortgage refinancing is one of the main ways households can benefit from a decline in the cost of credit. This column uses the US Government’s Home Affordable Refinancing Program (HARP) as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. The results suggest that less creditworthy borrowers significantly increase their spending following refinancing. The authors provide comprehensive evidence that competitive frictions in intermediation sector prevented a large number of such eligible borrowers from benefiting from the programme. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the programme could increase overall consumption and alleviate uneven economic outcomes across the country.

Mortgage refinancing is one of the main channels through which households can benefit from decline in the cost of credit. Indeed, because fixed-rate mortgage debt is the most dominant form of financial obligation of households in the US, refinancing constitutes one of the main direct channels for the transmission of simulative effects of accommodative monetary policy. Consequently, in times of adverse economic conditions, the Federal Reserve Bank commonly aims to keep interest rates low in order to encourage mortgage refinancing, lower foreclosures, and stimulate household consumption. The effectiveness of such actions, however, depends on the ability of households to access refinancing markets and on the extent to which lenders compete and pass through lower rates to consumers.

While there is no work that has systematically analysed these issues, the importance of the first factor became apparent in aftermath of the recent financial crisis when many mortgage borrowers lost the ability to refinance their existing loans (Hubbard and Mayer 2009). Faced with a situation in which close to half of all borrowers in the economy were severely limited from accessing mortgage markets, the federal government launched a large-scale refinancing initiative called the Home Affordable Refinancing Program (known as ‘HARP’). In a nutshell, the Home Affordable Refinancing Program allowed eligible borrowers with insufficient equity to refinance their mortgages by extending explicit federal credit guarantee to lenders.

In a new paper (Agarwal et al. 2015), we use HARP as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. We address two aspects. First, we quantify the impact of HARP on mortgage refinancing activity and analyse consumer spending and other economic outcomes among borrowers and regions exposed to the programme. Second, we investigate the role of competitive frictions in the financial sector in hampering programme’s reach and effectiveness.

To address the first aspect, we use detailed, comprehensive loan-level panel data from a large market participant with refinancing history and social security number matched consumer credit records of each borrower, as well as accurate data and consumer spending patterns at the zip code level. A difference-in-difference empirical design based on eligibility requirements of the programme reveals a substantial increase in refinancing activity via the programme. More than 3 million eligible borrowers with primarily fixed-rate mortgages – the predominant contract type in the US – 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. As Figure 1 illustrates, there was a significant increase in the durable spending (new auto financing) by borrowers after refinancing, with larger increase among more indebted borrowers. We also find that regions more exposed to the programme saw a relative increase in non-durable and durable consumer spending (auto and credit card purchases), a decline in foreclosure rates, and faster recovery in house prices. This evidence is consistent with recent work by Keys et al. (2014) and Di Maggio et al. (2014), who show that a sizable decline in mortgage payments on adjustable rate mortgages induces a significant increase in new financing of durable consumption, an overall improvement in household credit standing, and a range of regional economic outcomes.

Figure 1. New auto financing and credit card spending growth following HARP implementation

(a) Cumulative change in borrower level net new auto financing growth

(b) Regional credit card spending

Notes: Figure (a) shows the estimated cumulative change in the net amount of new auto financing (in dollars) along with 99% confidence intervals in the eight quarters following the HARP refinancing. These estimates are from a borrower level specification where the dependent variable takes the value of one if a new auto financing transaction takes place in a given quarter and is zero otherwise. We include a set of controls capturing borrower, loan, and regional characteristics and a set of quarterly time dummies that capture the three quarters preceding HARP refinancing and eight quarters following HARP refinancing date. Figure (b) shows the average credit card spending growth in the high HARP exposed (solid line) and low HARP exposed (dashed line) zip codes. Zip code credit card spending growth is computed using proprietary data from U.S. Treasury. Source: Agarwal et al. (2015).

Surprisingly, while borrowers who took advantage of the programme seemed better off, a significant number of eligible borrowers (between 40% to 60%) did not take advantage of the programme. In the second part of our analysis, we argue that a lack of intermediary competition was partly responsible for limiting HARP’s reach and effectiveness. There are at least two reasons why competitive frictions could play an important role in the programme’s implementation. First, to the extent that an existing relationship might confer some competitive advantage to the incumbent lender – whether through lower (re-)origination costs, less costly solicitation, or better information regarding borrower conditions – such advantages could be enhanced under the program since it targeted more indebted borrowers. Second, in an effort to encourage participation, the programme’s rules imposed a lesser legal burden on existing lenders potentially granting them some additional monopoly power.

A variety of identification strategies confirm that competitive frictions in the refinancing market did significantly hamper the programme’s impact. In particular, we first show that the interest rates on HARP refinances are significantly higher relative to interest rates on refinances originated during the same period but in a relatively more competitive conforming loan market. Our detailed loan-level data on fees charged by government-sponsored enterprises for insuring credit risk of loans allow us to show that this mark-up is not due to differential creditworthiness of borrowers refinancing in the two markets.  Next, we exploit variation within the HARP borrowers that relates the terms of their refinanced mortgages to the interest rate on their legacy loans, i.e. the rate on the mortgage prior to HARP refinancing. As might be expected in the presence of limited competition, incumbent lenders extract more surplus from borrowers with higher legacy rates since such borrowers can be incentivised to refinance at relatively higher rates. Finally, we take advantage of changes in the programme’s rules that relaxed the asymmetric nature of higher legal burden for new lenders refinancing under the programme relative to incumbent ones. Using a difference-in-difference empirical design around the change in the rules, we show that a direct change to competition in the refinancing market significantly impacted both the intensive (i.e. mortgage rates passed to borrowers) and extensive (i.e. refinancing take-up rate) margins.

On average, competitive frictions cut interest rate savings by 16-33 basis points, reducing the benefit from refinancing to borrowers who chose to refinance by 10 to 20 percentage points ($400 to $800 per year per borrower). Perhaps more interestingly, we find that these mark-ups reduced the rate at which eligible borrowers refinanced by about 10 to 20 percentage points. These effects are largest among the group of the borrowers that were the main target of the programme, i.e. those with the least amount of home equity who we show have the highest propensity to consume from savings induced by refinancing.

Figure 2. Impact of “monopolistic” markups on HARP’s reach


There are three lessons that emerge from our analysis:

  • First, by adversely altering refinancing activity – the take up rate as well as the pass through – competitive frictions significantly reduced the programme’s effect on consumption of eligible households, especially of indebted households.

Thus, while borrower-specific factors (e.g. inattention) or other institutional frictions (e.g. servicer capacity constraints) may also help account for the muted response, our evidence suggests that provisions limiting the competitive advantage of incumbent banks with respect to their existing borrowers should be an active consideration when designing stabilisation polices such as the Home Affordable Refinancing Program. This insight could apply to other policies whose implementation depends on intermediaries with incumbency advantage with respect to targeted agents.

  • Second, our results also speak to HARP’s impact on redistribution and the overall consumption response in the economy.

Although we cannot quantify the overall general equilibrium effects of the programme, which might include the impact of HARP on profits of mortgage investors and their consumption, our results suggest that less creditworthy and more indebted borrowers significantly increased their spending following refinancing. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the programme could increase overall consumption and alleviate the regional dispersion in economic outcomes.

  • Third, our findings also have implications for the debate regarding optimal mortgage contract design, highlighting potential benefits of state-contingent contracts such as adjustable-rate mortgages.

In particular, by automatically reducing mortgage rates when market rates are low, adjustable-rate mortgages can help alleviate frictions due to the limited competition in the loan-refinancing market. Moreover, as adjustable-rate mortgages can allow quick refinancing of borrowers regardless of the extent of their housing equity or creditworthiness, such contracts may reduce the need for large-scale refinancing programmes like HARP, which, as we show, can face implementation hurdles. There are also additional benefits of adjustable-rate mortgages that might be useful to discuss in this context. Of course, such benefits need to be carefully weighed against the potential adverse costs of such mortgages.


Agarwal, S, G Amromin, S Chomsisengphet, T Piskorski, A Seru, and V Yao (2015), “Mortgage Refinancing, Consumer Spending, and Competition: Evidence from Home Affordable Refinancing Program”, SSRN Working Paper.

Di Maggio, M, A Kermani, and R Ramcharan (2014), “Monetary Pass-Through: Household Consumption and Voluntary Deleveraging”, Working Paper.

Hubbard, G, and C Mayer (2009), “The Mortgage Market Meltdown and House Prices”, The B.E. Journal of Economic Analysis & Policy 9(3), Article 8.

Keys, B J, T Piskorski, A Seru, and V Yao (2014), “Mortgage Rates, Household Balance Sheets, and Real Economy”, NBER Working Paper No. 20561.

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