The Home Affordable Refinancing Program will expire by the end of 2016, barring a renewal, and the question is how effective has it been?
A new white paper by Tomasz Piskorski from Columbia Business School and Amit Seru from the University of Chicago, along with other economists at federal regulatory agencies, provides the first comprehensive analysis of the effects of HARP.
In May, the Federal Housing Finance Agency extended HARP through 2016.
They used proprietary loan-level panel data from a large market participant with refinancing history and social security number matched consumer credit records of each borrower.
“We find that the program led to a substantial increase in refinancing activity,” the authors say. “More than 3 million eligible borrowers refinanced their loans under HARP.”
Researchers found that on average, borrowers received a reduction of around 140 basis points in interest rate due to HARP refinancing.
This translates to about $3,500 of annual savings per borrower, according to the paper.
“There were real consequences of these savings since borrowers and 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,” they found.
However, they also found that HARP’s potential reach was substantially hampered.
This is one of the reasons the FHFA director extended HARP’s deadline.
“Although the number of new borrowers entering these two programs continues to decline, in part because many eligible borrowers have already taken advantage of them and in part because of recovering house prices, lenders and servicers are continuing to approve new HAMP modifications and HARP refinances,” FHFA Director Mel Watt said at the Greenlining Institute’s 22nd Annual Economic Summit in Los Angeles in May, when he made the announcement.
“Extending HAMP and HARP through the end of 2016 will provide real relief for borrowers who continue to face challenges either paying their mortgage or refinancing their loan,” Watt said.
In particular, only about half of the eligible borrowers took advantage of the program.
“We investigate the reasons behind the program shortfall and find it is in large part due to limited competition among banks in the refinancing market,” they say. “On average, these frictions reduced the extent to which interest rate savings were passed on to the borrowers costing an average borrower $400-$800 of forgone savings per year.”
These reduced savings also discouraged between 10%-20% of eligible borrowers from taking advantage of the program to begin with, they found. Furthermore, these adverse effects due to limited competition were the largest among the most indebted borrowers who were the key target of the program and have the highest propensity to consume from additional liquidity.
“Overall our results suggests that competitive frictions in the refinancing market may have significantly reduced the effect of Fed low interest rate policy on consumption and broader economic recovery, while yielding billions of dollars of profits to large banks,” they say.
To review the full paper, click here.