Mortgage Rates Are Low: Why Aren’t Minority Homeowners Refinancing?
With mortgage interest rates at record highs, 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 take advantage of the savings.
From January 2020 to October 2020, only 6% of black homeowners refinanced, compared to nearly 12% of white homeowners, according to the report, which also found a significant racial gap in past due mortgage payments during the pandemic.
Another recent survey by Freddie Mac found that nearly half of black and Hispanic borrowers could save $ 1,200 a year by refinancing, but they are doing so at significantly lower levels than white borrowers.
Wharton real estate professor Benjamin Keys wants to see this gap close.
“I still see mortgage refinancing as the one financial decision that households leave a lot of money on the table and not take advantage of,” he said. “With all the personal financial advice you can get – cut back on Starbucks or whatever – it’s just a drop in the bucket compared to locking in a long-term low mortgage rate on your home.”
“I encourage people to shop from trusted sources and to return to their bank to talk to them.” –Benjamin Keys
The reasons for the racial disparity in refinancing match documented evidence of other inequalities in housing, Keys said in an interview with Wharton Business Daily on SiriusXM. (Listen to the podcast above.) Structural racism embedded in both public policy and the private sector has led to a long-standing asymmetry in income, credit scores, loan-to-value ratios, and other factors. of risk that prevent the refinancing of minorities.
The coronavirus pandemic is making the problem worse, Keys said, because black and Hispanic households are more likely to lose their jobs than white households. The US unemployment rate in May fell to 5.8%, but it was 7.3% for Hispanics and 9.1% for blacks.
“Part of it may be the simple measure of income and job disruptions, but I think there is another factor, which relates to the current mortgage credit crunch,” Keys added. “Mortgage credit is seen as very tight. It can be difficult to get a loan, and there are a lot of hurdles to overcome when you refinance.
Refinancing can add up to thousands of upfront costs for property revaluation, title search, application fees, and other fees. These costs can be a deterrent for some minority homeowners who are cash strapped or perhaps leery of the process.
“They may think it was already a big burden to jump through those hoops once before, so they may not feel like it’s worth it,” Keys said. “Or they may fear being turned down if they reapply. “
Confidence is another issue, he said. Bad treatment in the past and the fear of falling into the trap of a fraudulent offer may 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 from trusted sources and to go back to their bank and talk to them,” he said. “The biggest refinancing boom has subsided a bit, so I feel mortgage brokers and lenders have a little more capacity right now to answer phone calls and answer questions.”
Why can’t refinancing be automatic?
The most popular mortgage loan in America is the 30 year fixed rate loan. It’s stable and secure, although it’s not 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. Yet there is not much innovation when it comes to loan instruments.
“It can be difficult to get a loan, and there are a lot of hurdles to overcome when you refinance.” –Benjamin Keys
The idea of automatic refinancing, which would kick in when rates drop a certain number of basis points, would benefit all households and help even out some of the racial disparities, he said. Automatic refinancing is certainly possible from a technical and service point of view; variable rate mortgages already do. But getting mortgage-backed securities investors to accept it would be a challenge.
“Are investors prepared to assess and understand the risks they would face if they bought into a pool of these mortgages? I think it’s something really worth experiencing, ”Keys said. “There is just a real shortage of innovation, and as we see the resignation of the chairman of the Federal Housing Authority, I think there is potential for someone to step into this space and really reinvigorate Fannie. Mae and Freddie Mac as innovation drivers and mortgage finance.
Mortgage interest rates hover just above 3% for a 30-year loan and below for a 15-year loan and an ARM. Record low rates, which are the result of the Fed’s monetary policy and other market factors, are expected to rise very gradually over the next two years. That means now is the time to refinance or buy a home, Keys said.
“I don’t have a crystal ball, but it looks like interest rates are going to stay pretty low on the mortgage side,” he said. “I doubt they’ll go back to where they were at 2.75% or even slightly lower, so locking in a rate around 3% sounds like a fantastic option.”