Many homeowners took advantage of historically-low interest rates in 2020 by refinancing. This tumultuous year witnessed the highest dollar amount of mortgage loan originations in U.S. history, with just over $4 trillion in mortgage originations occurring last year. Of this total amount, refinances made up 35% or $2.6 trillion.
However, the tendency to refinance mortgages differs among racial groups, leading to some groups being stuck with higher interest rates.
Black and Latinx homeowners paid higher interest rates than White homeowners between 2005 and 2020. Black homeowners paid up to 50 basis points higher on interest rates than White homeowners, according to a recent report from the Federal Reserve Bank of Atlanta. Refinancing into lower rates not only allows homeowners to save money, but it can also help them pay off their home more quickly and allows them to make improvements to their property.
Why does this disparity exist?
White homeowners pay lower interest rates because they are much more likely to take advantage of periods of falling interest rates by refinancing their mortgages or moving, as found in the report.
The report concludes that although Black and Latinx homeowners also benefit from periods of lower mortgage rates, they benefit much less than White homeowners.
These findings lead to a few key questions: First, why do Black and Latinx homeowners refinance less frequently than their White counterparts? Relatedly, why are they less responsive to dips in interest rates?
Observable differences such as loan-to-value ratios (LTVs) and credit scores across homeowners explain about 80% of the difference. However, a gap remains which has not been fully accounted for.
Numerous factors contribute to the remaining gap, including:
- different levels of education and financial literacy;
- exposure to employment shocks that may inhibit the ability to refinance into low rates; and
- social networks.
What might be done to reduce these racial differences in interest rate payments?
The report offers a few suggestions:
- expanding the use of adjustable-rate mortgages (ARMs), rather than relying on fixed-rate mortgages (FRMs) – though firsttuesday recommends ARMs for seasoned investors only, rather than the average homeowner due to the risk of payment shock when the ARM resets;
- encouraging the mortgage industry to develop products that combine the benefits of FRMs and ARMs, such as mortgages that adjust down, not up; and
- enacting complementary race-neutral policies that make it easier and less costly to refinance, such as providing streamlined refinancing programs.
With interest rates still near historic lows in 2021, as a real estate professional, you may want to advise all your clients to refinance to take advantage of today’s low rates.
One way to advise clients is to use FARM letters in your marketing to inform homeowners about their options. Click here to download free marketing material to share with your current and potential clients on the benefits of refinancing.
Other obstacles to homeownership for minority homebuyers
The decline in American homeownership rates since the Millennium Boom is most severe among Black Americans. The gap between White and Black homeownership rates is particularly wide.
During the Millennium Boom era, predatory lending practices steered minority homebuyers into subprime mortgages, a type of loan that mortgage holders were aware had a higher likelihood of default.
For a recent example of predatory lending practices, look no further than 2012, when Bank of America (BofA) settled a case for their subsidiary company, Countrywide, due to their discriminatory lending practices.
Countrywide discriminated against minority homebuyers by:
- charging higher fees to minorities than White homebuyers with equivalent qualifications; and
- steering minority homebuyers into subprime mortgages.
These factors led to minority homebuyers paying more for mortgages than similarly qualified White homebuyers. Thus, when the housing bubble burst following the Millennium Boom, these minority homeowners had more difficulty making mortgage payments than White homeowners, even when they had borrowed at equivalent levels and with the same qualifications.
Another homeownership obstacle for minority homebuyers is the statistical fact that Black and Latinx heads of households tend to be employed in professions more adversely affected by periods of economic downturn. Thus, in recessionary periods, they are more exposed to job losses than are White heads of households.
Predatory lending practices targeting minority homebuyers and increased employment instability for these demographics also leads to higher foreclosure rates.
As a real estate professional, consider the following tactics to ensure all clients have an equal chance at homeownership:
- vigilantly observe and oppose predatory lending;
- when mortgage applications are denied, discover the reason why; is it to do with observable differences such as high debt-to-income (DTI) ratios or another reason;
- when denied for qualifying reasons, encourage your client to pay down debts and apply again in a few months or a year;
- in the case of no observable reason for the denial or adverse mortgage terms offered, advise your client the options available to them, such as applying elsewhere or filing an official complaint; and
- when the client suspects they may be the victim of discriminatory practices, they may report the incident to the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau (CFPB).
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