Businesses are forever insisting that a little less competition won’t lead to higher prices. What’s one more merger? What’s one more barrier to entry?
A new study of the mortgage market nicely highlights just how little it can take to undermine competition to the point that it starts costing customers.
The paper is both a critique of a specific government initiative — a refinancing program created after the financial crisis — and a clever use of that program to examine what happens when an industry’s rule are suddenly changed.
The Home Affordable Refinancing Program, or HARP, was started in 2009 to enable homeowners to refinance at lower rates even if they didn’t have enough equity in the home to meet the standards of lenders, a common predicament after the nationwide collapse of housing prices. Borrowers with less than 20 percent equity found it all but impossible to refinance — and about 30 percent of people with mortgages were in that boat back in 2010.
HARP is not a foreclosure prevention program. It is open only to those the government called “responsible homeowners” — people who had not missed mortgage payments. The point is to put money into their pockets. (And by the way, the program is still available for one more year.)
The mechanics are fairly simple: The government instructed the mortgage finance companies Fannie Mae and Freddie Mac to guarantee loans that replaced loans they had previously guaranteed, even if the amount of the loan exceeded 80 percent of the value of the home.
But in the new paper, Gene Amromin, an economist at the Federal Reserve Bank of Chicago, and Caitlin Kearns, a graduate student in economics at the University of California at Berkeley, highlight a wrinkle that prov
via Here’s How Lack of Competition Can Hurt Consumers – NYTimes.com.
