How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP

Abstract

We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing into a lower-rate mortgage on borrower balance sheet outcomes. Refinancing substantially reduces borrower default rates on mortgages and other debt. Refinancing also causes borrowers to expand their use of debt instruments, such as auto loans, home equity lines, and other consumer debts that are proxies for spending. Borrowers that appear more constrained ex ante grow these debts more strongly after refinancing but also pay down credit card balances by more. These borrowers also have lower take-up of the refinancing opportunity. (JEL G51, G21, E52)

Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

“…While not necessarily causal evidence, Figure A-5 uses an event study approach to show that auto spending patterns around rate-refinancing are consistent with the sizable short-run consumption effects in our model: households are almost twice as likely to take out a new auto loan in the months immediately after they engage in rate refinancing. Abel and Fuster (2018) provide further evidence that rate refinancing indeed has sizable and fairly immediate causal effects on borrower behavior. Overall, we view the path-dependent spending effects in our model as both sizable and broadly consistent with micro evidence on the refinancing channel of monetary policy as well as macro evidence on overall GDP responses to monetary policy.…”

“…12 See Di Maggio, Kermani, Keys, Piskorski, Ramcharan, Seru and Yao (2017), Agarwal, Amromin, Chomsisengphet, Landvoigt, Piskorski, Seru and Yao (2017), Greenwald (2017), Wong (2018), Beraja, Fuster, Hurst and Vavra (2018), Di Maggio, Kermani and Palmer (2016), Guren, Krishnamurthy and McQuade (2018) and Abel and Fuster (2018).…”

Untitled

“…In fact, one can reasonably argue that as long as the new monthly payment drops, the new mortgage is at lower risk of default compared with the previous loan. Empirical evidence shows that indeed, a decline in monthly mortgage payments, all else being equal, significantly reduces the risk of mortgage default (Fuster and Willen, 2017, Di Maggio et al, 2017, and Abel and Fuster, 2019. This lower risk is especially true for loans insured by Fannie Mae/Freddie Mac, the Federal Housing Administration (FHA), or the US Department of Veterans Affairs (VA), organiza-tions that are the focus of this paper.…”

FHA, Fannie Mae, Freddie Mac and the Great Recession

“…(2015) show that HARP resulted in increased refinance activity, increased consumer durables and nondurables spending, lower foreclosure rates and faster recovery in house prices. Abel and Fuster (2018) show that HARP resulted in reduced default rates and increased other forms of consumer debt, consistent with increased consumer spending.…”

“…While these mortgage programs promoted the economic recovery (Agarwal et al . 2015, 2017; Abel and Fuster 2018), they occurred relatively late and therefore did not shield affected counties from the effects of a large credit supply shock. In this article, we show that precrisis government mortgage programs—those that were already in place prior to the financial crisis—provided a more stable supply of credit and thereby lessened the effects of the large credit supply shock which ultimately led to the Great Recession.…”