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Unintended Consequences of the Home Affordable Refinance Program

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  • 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

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    1. 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.
    2. 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.
    3. Keys, Benjamin J. & Pope, Devin G. & Pope, Jaren C., 2016. "Failure to refinance," Journal of Financial Economics, Elsevier, vol. 122(3), pages 482-499.
    4. 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.
    5. Jason Allen & Shaoteng Li, 2025. "Dynamic Competition in Negotiated Price Markets," Journal of Finance, American Finance Association, vol. 80(1), pages 561-614, February.
    6. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
    7. Umit G. Gurun & Gregor Matvos & Amit Seru, 2016. "Advertising Expensive Mortgages," Journal of Finance, American Finance Association, vol. 71(5), pages 2371-2416, 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.
    9. Bhutta, Neil & Hizmo, Aurel, 2020. "Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market," CEPR Discussion Papers 14924, C.E.P.R. Discussion Papers.
    10. 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.
    11. Allen, Jason & Clark, Robert & Houde, Jean-Francois, 2018. "Search frictions and market power in negotiated price markets," Queen's Economics Department Working Papers 274729, Queen's University - Department of Economics.
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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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