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.

The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an overall increase in the intensity of renegotiations while adversely affecting the effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in the rate of foreclosures and reached just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers-which is also observed before the program-does not reflect differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, it reflects servicer-specific factors that appear to be related to their preexisting organizational capabilities. We exploit regional variation in the share of loans serviced by intermediaries with high pre-program renegotiation activity to assess the economic effects in areas more exposed to the program. Regions where HAMP was used intensively saw a lower rate of house price decline as well as an increase in the pay-down rate on consumer debt. There was no change in non-durable and durable consumption in these regions, suggesting that distressed borrowers who are in the process of debt deleveraging may have a relatively low spending multiplier from moderate debt reduction. We conclude by discussing implications of our findings for debt relief programs in general and for other policy responses to crises that also require intermediaries for implementation. JEL: E60, E65, G18, G21, H3

Data obtained from monthly Gallup/UBS surveys from 1998 to 2007 and from a special supplement to the Michigan Surveys of Consumer Attitudes and Behavior, run in 22 monthly surveys between 2000 and 2005, are used to analyze stock market beliefs and portfolio choices of household investors. We show that the key variables found to be positive predictors of actual stock returns in the asset-pricing literature are also highly correlated with investor's subjective expected returns, but with the opposite sign. Moreover, our analysis of the microdata indicates that subjective expectations of both risk and returns on stocks are strongly influenced by perceptions of economic conditions. In particular, when investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This is difficult to reconcile with the canonical view that expected returns on stocks rise during recessions to compensate household investors for increased exposure or sensitivity to macroeconomic risks. Finally, the relevance of these investors' subjective expectations is supported by the finding of a significant link between their expectations and portfolio choices. In particular, we show that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns or lower uncertainty. This paper was accepted by Brad Barber, finance.

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