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

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

This paper seeks to refine our understanding of how refinancing a mortgage affects household outcomes. This issue has attracted particular attention in the wake of the Great Recession, however, there is still not much clean evidence on the causal effects of refinancing on borrower outcomes, nor on the heterogeneity of these effects across different borrower types. The authors of this paper use quasi-random access to a refinancing opportunity during the recovery from the Great Recession to study how refinancing a mortgage affects households’ financial decisions and outcomes. Specifically, they exploit the fact that the Home Affordable Refinance Program (HARP), which was introduced in early 2009 to enable borrowers to refinance even if they had little equity in their home, was only available to borrowers whose loans had been securitized before a certain cutoff date. A focus on borrowers who originated loans in a six-month window near that cutoff date shows that those that are eligible are subsequently much more likely to refinance over the period from 2010 to 2015. Based on this source of variation, they confirm some findings in the previous literature that refinancing substantially reduces mortgage default and spurs borrowers to take on auto debt. They then show that the effects—increasing balances and decreasing defaults—extend to other debt instruments, such as home equity lines of credit and retail consumer debt.

Joshua Abel and Andreas Fuster

Joint Center for Housing Studies of Harvard University

May 15, 2019

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