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

We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing a mortgage on borrower balance sheet outcomes. We find that on average, refinancing into a lower-rate mortgage enabled borrowers to cut their default rates on mortgages by around 40% and their rates of serious delinquency on non-mortgage debts by about 25%. Refinancing also causes borrowers to expand their use of debt instruments, such as auto loans, home equity lines of credit (HELOCs), and other consumer debts that are proxies for spending. All told, refinancing led to a net increase in debt equal to about 20% of the savings on mortgage payments. This number combines increases (new debts) of about 60% of the mortgage savings and decreases (pay-downs) of about 40% of those savings. Borrowers with low FICO scores or low levels of unused revolving credit grow their auto and HELOC debt more strongly after a refinance, but also reduce their bank card balances by more. Finally, we show that take-up of the refinancing opportunity was strongest among borrowers that were in a relatively better financial position to begin with. ∗We are grateful to Joseph Tracy and Paul Willen for discussions that were very helpful in the development of this study. We also thank participants in Harvard’s PF/Labor Lunch and Macro Lunch for helpful comments. The views expressed in this paper are solely those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. †Harvard University, Department of Economics. E-mail: [email protected] ‡Federal Reserve Bank of New York. E-mail: [email protected]