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With mortgage interest rates at record lows, it’s no surprise that millions of homeowners are rushing to refinance their loans. But a new report from Federal Reserve economists shows a surprising gap between white and minority borrowers who are taking advantage of the savings.
From January 2020 to October 2020, only 6% of Black homeowners refinanced, compared with nearly 12% of white homeowners, according to the report, which also revealed a significant racial gap in past-due mortgage payments during the pandemic.
Another recent survey from Freddie Mac found that almost half of Black and Hispanic borrowers could save $1,200 a year by refinancing, yet they are doing so at substantially lower levels than white borrowers.
Wharton real estate professor Benjamin Keys wants to see that gap closed.
“I always think of mortgage refinancing as the one financial decision that households leave a lot of money on the table by failing to take advantage of,” he said. “With all the personal financial advice you can get out there — cut back on your Starbucks purchases or whatever — those are just a drop in the bucket compared to locking in a long-term low mortgage rate for your home.”
“I encourage people to shop around with reputable sources and to go back to their bank and talk to them.” –Benjamin Keys
The reasons behind the racial disparity in refinancing align with documented evidence about other inequities in housing, Keys said during an interview with Wharton Business Daily on SiriusXM. (Listen to the podcast above.) Structural racism built into both public policy and the private sector has led to longstanding asymmetry in income, credit scores, loan-to-value ratios and other risk factors that inhibit refinancing for minorities.
The coronavirus pandemic is exacerbating the problem, Keys said, because Black and Hispanic households are more likely to experience job loss than white households. The U.S. unemployment rate in May dropped to 5.8%, yet it was 7.3% for Hispanics and 9.1% for Blacks.
“Some of this may be a function of just measuring incomes and employment disruptions, but I think there is another factor, which is related to just how tight mortgage credit is right now,” Keys added. “Mortgage credit is perceived as being very tight. It can be a hard time to get a loan, and there are a lot of hoops to jump through when you’re refinancing.”
Refinancing can run into the thousands in upfront costs for property reappraisal, title search, application fees and other fees. Those costs can be a deterrent for some minority homeowners who are strapped for cash or perhaps leery of the process.
“They may feel it was already a big burden to jump through those hoops once before, so they may not feel like it’s worth the effort,” Keys said. “Or they may be worried about being turned down if they go and apply again.”
Trust is another issue, he said. Poor treatment in the past and fears of falling for a scam offer can prevent some minority homeowners from researching their refi options. But Keys encouraged them not to miss out on the potential savings.
“I encourage people to shop around with reputable sources and to go back to their bank and talk to them,” he said. “The biggest boom of refinancing has waned a bit, so my sense is that mortgage brokers and lenders have a bit more capacity at the moment to be fielding phone calls and to be answering questions.”
Why Can’t Refinancing Be Automatic?
The most popular mortgage in America is the 30-year, fixed-rate loan. It’s steady and safe, even if it isn’t always the best choice for consumers, Keys said. For example, young borrowers are unlikely to stay in the same home long enough to reap the benefits. Still, there isn’t a lot of innovation when it comes to loan instruments.
“It can be a hard time to get a loan, and there are a lot of hoops to jump through when you’re refinancing.” –Benjamin Keys
The idea of automatic refinancing, which would kick in when rates fell by a set number of basis points, would benefit all households and help equalize some of the racial disparities, he said. Automatic refinancing is certainly possible from a technical and service aspect; adjustable-rate mortgages already do this. But getting investors of mortgage-backed securities to accept it would be a challenge.
“Are investors willing to price and understand the risks that they would be facing if they were to buy into a pool of these mortgages? I think it’s something that’s really worth experimenting with,” Keys said. “There’s just a real shortage of innovation, and as we see the stepping down of the head of the Federal Housing Authority, I think there’s the potential for someone to come into that space and really reinvigorate Fannie Mae and Freddie Mac as engines of innovation and mortgage finance.”
Mortgage interest rates are hovering just above 3% for a 30-year loan and below that for a 15-year loan and an ARM. The record low rates, which are the result of the Fed’s monetary policy and other market factors, are expected to rise very gradually in the next year or two. That means now is a great time to refinance or buy a home, Keys said.
“I don’t have a crystal ball, but it seems like interest rates are going to stay fairly low on the mortgage side,” he said. “I doubt they’re going to plummet back to where they were at 2.75% or even slightly lower, so locking in a rate around 3% seems like a fantastic option.”