CFPB says minority borrowers lack the chance to refinance

Not all eligible borrowers will be afforded the opportunity to refinance their mortgages as rates decline, a blog from the Consumer Financial Protection Bureau claims.

Slightly less than one quarter of current mortgage borrowers have a loan at an interest rate at 5% or higher, the group most likely to benefit from a refinancing. That includes the 14% share whose rate is over 6%.

Nearly 60% of these loans were originated in the last two years. However, based on historic patterns, the CFPB post said, minority borrowers do not have that opportunity to reduce their mortgage rate.

The three largest cohorts of existing borrowers were in the under-5% buckets with 35% between 3% and 4%; 22% with a rate lower than 3%; and 19% between 4% and 5%.

The share of refinance rate locks was just under 30% on Sept. 16, according to product and pricing engine technology company Optimal Blue.

For the month of August, refis had a 26% share, with the rate-and-term variety reporting a 109% month-to-month and a 300% year-over-year improvement in volume, Optimal Blue said.

"Even as interest rates fell to historic lows in 2020 and 2021, about 3.7 million mortgages (7.4%) still had interest rates of at least 6% and another 3.5 million (7%) had interest rates of at least 5%," the CFPB Office of Mortgage Markets wrote. "Researchers at the Atlanta Fed found that Black and Hispanic borrowers were less likely to refinance than other borrowers, even after controlling for factors like credit scores, home equity, and income."

The CFPB also cited a Federal Deposit Insurance Corp. study that claimed "suggestive evidence" indicated that marginal borrowers are crowded out from supply constrained markets before they can apply for a refi. The lenders instead targeted borrowers with high loan balances, high incomes, and high credit scores, the FDIC declared.

An April 2021 Freddie Mac blog that was not cited by the CFPB pointed out "geographically, the counties hit hardest by the pandemic also saw some of the largest refinancing income gaps. And in terms of health and economic implications, the pandemic continues to impact communities of color disproportionately, leaving them less likely to refinance."

It was exacerbated by factors like income and employment shocks, their access to financial education and the differences in information networks where they could get information about refinancing.

A research note Freddie Mac issued the following month that cites the Atlanta Fed research pointed out that closing costs associated with a refinance of what was then nearly $5,000 could be an issue for those that lack the liquid assets.

Among the options that they might not be taking advantage of was doing a no-closing cost loan (the rate is higher but the borrower still saves money) and shopping a number of lenders for rate, the May 2021 post said.

In its new post, the CFPB noted refinancing gives consumers' money to spend on other things, which could benefit the economy.

For millions of borrowers, the opportunity to refinance would create significant savings and potentially improve financial stability.

"The CFPB will continue to monitor and report on refinancing activity and industry practices that encourage or discourage borrowers seeking to refinance. The CFPB is also exploring ways to streamline the refinancing process and reduce closing costs," the post said.

The mortgage analysts at Keefe, Bruyette & Woods expect refinance volume to continue increasing, especially in the Federal Housing Administration and Veterans Affairs markets where the process is easier. FHA loans have lower down payment and credit score requirements than conforming mortgages. The VA program allows for eligible borrowers to receive 100% financing.

Both programs have lower average rates than the conforming product. Optimal Blue had the 30-year conforming at 6.038% as of Sept. 16, while FHA was 5.929% and the VA product had the lowest rate of all at 5.455%.

Citing the most recent Mortgage Bankers Association report, FHA refi activity was up 44% sequentially quarter to date, said Bose George of KBW. Meanwhile VA refis increased 105%, compared with 38% for the market as a whole.

KBW's models call for $609 billion of refinance next year, a 51% increase from the "low base of $402 billion we are currently forecasting for 2024," George said.

"We would note that the majority of the mortgage universe remains [275 basis points to 300 basis points] out of the money to refinance, and the bulk of 2024 year-to-date refinance activity reflects cash-out debt consolidation loans," he continued, adding KBW forecasts $649 billion of refi volume in 2026.