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<p>In this paper, we investigate the mortgage curtailment behavior of borrowers following their participation in the Home Affordable Refinance Program (HARP). When homeowners refinance into a lower mortgage rate, their subsequent payment behavior is influenced by two opposing forces: the income effect, which encourages higher curtailment due to reduced required payments, and the intertemporal substitution effect, which discourages curtailment due to lower borrowing costs. We find that the income effect dominates. On average, HARP refinance participants increased their monthly curtailment by $223, equivalent to 18.7% of the required monthly mortgage payment, compared to their pre-program payments. Our analysis reveals that borrowers with higher incomes, higher credit scores, and mortgages with lower origination loan-to-value (LTV) ratios contributed more significantly to this curtailment increase. To address potential endogeneity concerns—specifically, that borrowers with greater financial literacy may be more likely to participate—we leverage the quasi-experimental framework provided by HARP eligibility criteria. Our results demonstrate that HARP eligibility prompts borrowers to curtail their mortgage payments by an additional $37.7 compared to ineligible borrowers. We further employ instrumental variable (IV) estimation and a matching process for robustness. These findings suggest that refinancing not only lowers payment obligations but also promotes voluntary deleveraging, providing empirical evidence of how liquidity gains shape household financial behavior.</p>

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Mortgage Curtailment Pre and Post-HARP: Income and Substitution Effects

  • 期刊论文

  • 发表日期：

    2025年5月26日

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  • Wenzhen Lin,
  • Yingqi Xu

摘要

In this paper, we investigate the mortgage curtailment behavior of borrowers following their participation in the Home Affordable Refinance Program (HARP). When homeowners refinance into a lower mortgage rate, their subsequent payment behavior is influenced by two opposing forces: the income effect, which encourages higher curtailment due to reduced required payments, and the intertemporal substitution effect, which discourages curtailment due to lower borrowing costs. We find that the income effect dominates. On average, HARP refinance participants increased their monthly curtailment by $223, equivalent to 18.7% of the required monthly mortgage payment, compared to their pre-program payments. Our analysis reveals that borrowers with higher incomes, higher credit scores, and mortgages with lower origination loan-to-value (LTV) ratios contributed more significantly to this curtailment increase. To address potential endogeneity concerns—specifically, that borrowers with greater financial literacy may be more likely to participate—we leverage the quasi-experimental framework provided by HARP eligibility criteria. Our results demonstrate that HARP eligibility prompts borrowers to curtail their mortgage payments by an additional $37.7 compared to ineligible borrowers. We further employ instrumental variable (IV) estimation and a matching process for robustness. These findings suggest that refinancing not only lowers payment obligations but also promotes voluntary deleveraging, providing empirical evidence of how liquidity gains shape household financial behavior.