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Unintended Consequences of the Home Affordable Refinance Program

Author

Listed:
  • Phoebe Tian
  • Chen Zheng

Abstract

We study the unintended effects of the Home Affordable Refinance Program (HARP) on mortgage borrowers. Originally designed to help financially distressed borrowers refinance after the 2008–09 global financial crisis, HARP inadvertently amplified the market power of incumbent lenders by introducing a cost differential between incumbents and their competitors. To assess the welfare implications of this cost advantage, we develop and estimate a structural model of dynamic refinancing decisions with lenders’ offers arising from a search and negotiation process. Our findings reveal that although the cost asymmetry was rectified by a 2013 policy, it still resulted in a welfare loss exceeding the impact of search frictions

Suggested Citation

  • Phoebe Tian & Chen Zheng, 2024. "Unintended Consequences of the Home Affordable Refinance Program," Staff Working Papers 24-11, Bank of Canada.
    • Handle: RePEc:bca:bocawp:24-11
    DOI: 10.34989/swp-2024-11
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    References listed on IDEAS

    as
    1. Gene Amromin & Caitlin Kearns, 2014. "Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition," Working Paper Series WP-2014-25, Federal Reserve Bank of Chicago.
    2. Andreas Fuster & Laurie Goodman & David O. Lucca & Laurel Madar & Linsey Molloy & Paul S. Willen, 2013. "The rising gap between primary and secondary mortgage rates," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 17-39.
    3. Jason Allen & Robert Clark & Jean-François Houde, 2019. "Search Frictions and Market Power in Negotiated-Price Markets," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1550-1598.
    4. Neil Bhutta & Andreas Fuster & Aurel Hizmo, 2026. "Paying Too Much? Borrower Sophistication and Overpayment in the U.S. Mortgage Market," Journal of Finance, American Finance Association, vol. 81(1), pages 49-90, February.
    5. Keys, Benjamin J. & Pope, Devin G. & Pope, Jaren C., 2016. "Failure to refinance," Journal of Financial Economics, Elsevier, vol. 122(3), pages 482-499.
    6. Jason Allen & Shaoteng Li, 2025. "Dynamic Competition in Negotiated Price Markets," Journal of Finance, American Finance Association, vol. 80(1), pages 561-614, February.
    7. Anthony A. Defusco & John Mondragon, 2020. "No Job, No Money, No Refi: Frictions to Refinancing in a Recession," Journal of Finance, American Finance Association, vol. 75(5), pages 2327-2376, October.
    8. Lance Brannman & Luke M. Froeb, 2000. "Mergers, Cartels, Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 283-290, May.
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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