Mortgage Relief: Who CARES?

Abstract

We analyze the effects of being ineligible for mortgage payment relief by examining the aftermath of the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with publicly (Freddie Mac) and privately (Bbx) securitized loans we compare loan performance and quantify potential wealth, consumption, and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for a government relief program. We show that restricting program benefits to include only borrowers in federally backed mortgage pools results in significant loss in wealth (through reduced prepayment and increased default) for those otherwise similar borrowers whose loans are placed outside of GSE pools. The greatest detriment is documented in CBSAs with the largest housing price declines. The results shed light on the potential consequences of an identical provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which provides mortgage forbearance relief to qualifying borrowers, whose loans are placed in a government backed mortgage pool.

Keywords:

• Mortgage
• HARP
• default

Acknowledgements

We thank those who provided feedback that substantially improved this work: anonymous referees, Lariece Brown, Geoffrey Turnbull, Avis Devine, Will Doerner, Will Larson, Kelley Pace, Yildiray Yildrim, and Alex Zevelev. Additionally, we appreciate helpful comments from presentations at the 2020 ASSA AREUEA Meetings, 2019 SEA Meetings, 2017 ARES, 2017 EFA Meeting, Florida State University and Baruch College. Any remaining errors are our own.

Notes

1 Agarwal et al. (2015a), Abel and Fuster (2018).

2 https://abcnews.go.com/Business/harp-home-affordable-refinance-program-hype/story?id=15972744

3 Source: Federal Reserve.

4 Nearly three trillion in mortgages were held on bank balance sheets and the rest by private individuals and life insurance companies.

5 Equity extraction through a cash-out refinance is another motivation for refinance.

6 Contemporaneous borrowers with Federal Housing Administration (FHA) backed loans were eligible for a streamlined refinance program with FHA (Caplin et al., 2015).

7 See www.fhfa.gov/AboutUs/Reports/ReportDocuments/Refi_1Q2017.pdf

8 We match on observed characteristics and are unable to account for unobserved risk variables such as potential differences in underwriting between GSEs and private issuers.

9 Loans from the PLS sample are identified by a 5-digit zip code; however, the Freddie Mac sample is only identified at the 3-digit zip code. Therefore, we construct our estimate of current housing values using the 3-digit zip indices.

10 We observe prepayment and therefore cannot distinguish between refinancing and other forms of voluntary prepayment. However, all groups of borrowers face the same constraints on selling a home where the outstanding loan amount exceeds the home value.

11 Mayer et al. (2014) provides evidence of strategic borrower behavior to gain eligibility for modification.