Homeowners continue to take advantage of low interest rates in 2020 and 2021 to refinance their homes and reduce their monthly mortgage payments. However, not all income groups have been able to take advantage of these low rates to refinance and improve their financial situation.
Between February and June 2020, compared to low-income refinancers, high-income refinancers were able to save ten times more than before the pandemic, according to a Federal Deposit Insurance Corporation (FDIC), Center for Financial Research (CFR) analysis of data on refinancing applications and funding rates. High-income refinancers saw a significant increase in refinancing activity compared to low-income refinancers.
By analyzing COVID-19 case rates within zip codes over time, the FDIC and CFR found that 74% of the increase in refinancing inequality changes were due to local economic conditions triggered by the pandemic. For example, low-income homeowners were more likely to feel the brunt of pandemic-related job losses, thus were less able to receive refinance approval.
During 2020, the share of low-income homeowners who refinanced increased slightly from 1.1% to 2.4%. During the same time, the share of high-income homeowners who refinanced increased significantly, from 1.1% to over 9.0%.
Before 2020, low-income refinancers received a 1.7 percentage point reduction in mortgage interest rates, conditional on refinancing. Fast forward to 2020, this reduction reached 1.8 percentage points in 2020, a minor improvement.
In contrast, high-income refinancers who refinanced their mortgages received reductions of only 1.5 percentage points before the pandemic and an average 1.9 percentage point reduction in 2020, translating to bigger savings.
It’s apparent that there is a large income gap in refinancing. The underrepresentation of low-income refinancers during 2020 is due to a combination of factors, including:
- lenders prioritizing homeowners with high home equities, which are more profitable as they produce higher fees;
- pandemic job losses having a greater impact on low-income refinancers, thus impacting credit and their ability to qualify for a refinance; and
- low-income refinancers showing limited financial literacy leading them to inaction, especially in an environment of scarcity and stress like the first few months of the pandemic.
Supporting low-income refinancers
To help balance this refinancing inequality, the authors of the FDIC and CFR study suggest legislators can create policies that promote refinancing activity of low-income refinancers in the early stages of the application-funding process. To begin creating these policies, legislators can focus on:
- creating incentives for lenders to deliver loans to borrowers that meet a target profile;
- encouraging financial education for low-income borrowers; and
- improving the refinancing processes to bypass the effects of behavioral biases, according to the FDIC and CFR.
When crafting these new policies, legislators need to be careful since it will be targeting low-income groups who are most vulnerable. Thus, any legislation created to increase refinancing for low-income groups needs to be micro-managed to a “T” to ensure that low-income borrowers won’t be negatively impacted, but will receive the full benefits of refinancing.
Real estate professionals can also take part to promote financial literacy by referring clients to the Consumer Financial Protection Bureau (CFPB) for a variety of educational resources and publications related to covering reverse mortgages, refinancing procedures, and the homebuying process.
firsttuesday has a number of free forms that agents can download and complete with clients, including a mortgage shopping worksheet which assists homebuyers in comparing mortgage terms. [See RPI Form 312]
Mortgage interest rates are on the rise, so this refinancing trend will most likely not continue. In fact, the refinance window is closing rapidly, so firsttuesday readers, stay tuned on how this trend progresses in the future.
Related article:
Refinancing and race: Why the divide and how to close the gap
Gee, banks prioritize doing business with high equity home owners whereby they earn more fees and probably have a greater chance of getting paid back according to the terms of the loan… Why is this bad business? Real Estate transactions in their purest form reveal the benefits of a free market. Let’s not try to put a social agenda on these transactions. When we do it inevitably does not end well (see mortgage industry melt down of 2006-2007).
Just because they’re low income doesn’t mean they’re higher risk than a higher income borrower with a bigger loan amount. There are many factors like credit score, payment history, LTV, etc. And whoever refinances to a lower rate has a greater chance of making their payments because their payment is lower. Especially if it’s just a rate/term refi and they’re not pulling cash.
What happened in 2008 was caused by all borrowers and loan amounts across the board………low income, high income, big and small loan amounts, investors/flippers/speculators. Cash out refinances and using the house as a piggy bank was commonplace. Stated income, pick a pay/negative amortization and hybrid ARM loans were fundamental problems.
Lets not oversimplify things and blame everything on the low income and/or less privileged.