February 03, 2023

A couple talking through safety-glass barrier with professional all wearing masks
Black homebuyers continue to face an uphill climb to get a new mortgage approved or refinance an existing one.

Black homeowners were largely absent from the surge of borrowers who refinanced their mortgages to lower rates during the COVID-19 pandemic, though recent research by the Atlanta Fed shows the group benefitted from other measures that eased foreclosure pressures during the economic downturn.

Black mortgage borrowers may have left significant sums of money on the table by not refinancing, Atlanta Fed research indicates. Researchers determined the total annual savings for mortgages refinanced by October 2020 was about $5 billion. Black households are to reap an estimated $198 million of the amount while White households account for an estimated $3.8 billion.

Looked at another way, Black households make up about 5.9 percent of the sample of mortgages in the study but account for only 3.7 percent of the aggregate interest savings. In contrast, White households represent about 69 percent of the sample while accounting for 71.1 percent of the interest savings. White households benefited in two ways: a greater proportion of White borrowers sought refinancing to a lower rate, and their interest rates going into the pandemic recession were lower than those of Black mortgage borrowers.

Being able to keep one's home is a sometimes-overlooked topic in the nation's broader discussion of housing and shelter, and these findings could inform future policies intended to help homeowners of all races and ethnicities retain their homes during economic downturns.

Drilling deeply into refinancing data

photo of Kristopher Gerardi
Kristopher Gerardi is a financial economist and senior adviser in the Atlanta Fed's Research Department.

Kristopher Gerardi, a financial economist and senior adviser in the Atlanta Fed's Research Department, has been involved with multiple recent pieces of research around this topic. Gerardi worked with Lauren Lambie-Hanson of the Philadelphia Fed and Paul Willen of the Boston Fed to produce two Policy Hub articles: "Racial Difference in Mortgage Refinancing, Distress, and Housing Wealth Accumulation" (June 2021) and "Lessons Learned from Mortgage Borrower Policies and Outcomes during the COVID-19 Pandemic" (July 2022). Beyond those articles, Gerardi collaborated with Willen and David Hao Zhang of the Harvard Business School to release the Atlanta Fed working paper "Mortgage Prepayment, Race, and Monetary Policy" in December 2020.

Nancy Flake Johnson was not surprised that the team found a lackluster response to mortgage refinancing by Black borrowers. The results fit into the broader housing situation Flake Johnson said she encounters as president and chief executive officer of the Urban League of Greater Atlanta. "It relates to access to employment, starting with the lack of affordable child care, and the low wages paid by many profitable companies," she said, as well as the legacy of borrowing challenges faced by Blacks seeking to buy a house or refinance that were exacerbated by the Great Recession.

"Rolling out of that period, millions of Black folks weren't thriving but were getting by, and starting to incrementally increase their income, and upskill, and were at the point of homeownership," Flake Johnson said. "Then the pandemic comes along. Those families didn't have a safety net and were thrown back into poverty. Lots of people lost their jobs, and you have to have income to refinance. Lots of people had credit scores go down, and you have to have that to refinance. And you have institutional bias built into lenders. They are conservative. They want to protect their assets, and they make the rules."

Information in the 2020 working paper by Gerardi, Willen, and Zhang illuminates Flake Johnson's points. White borrowers with mortgages insured by the government-sponsored enterprises Fannie Mae or Freddie Mac had higher household incomes and higher credit scores than Black and Hispanic borrowers. Average household incomes were $97,600 for Whites, $81,600 for Blacks, and $79,100 for Hispanic borrowers.

Average credit scores were 752, 715, and 730, respectively. The pattern was replicated in interest rates, at 5.18 percent, 5.64 percent, and 5.45 percent, respectively. The lower rate for White borrowers was associated with the trend among White borrowers to refinance at the lower rates available during periods of economic expansion.

In addition, White would-be borrowers present a profile different from Black and non-White Hispanic prospective borrowers. Applications from Whites tend to be submitted by males, 71.6 percent, who have a coapplicant 53.1 percent of the time. In contrast, a high proportion of applications from Blacks tend to be submitted by females, 47.8 percent, who file alone, 72.2 percent. Hispanic borrowers tend to be males, 68.8 percent, who file alone, 64.3 percent.

Joel Dixon said these data point to a mortgage environment in which Black homebuyers continue to face an uphill climb to get a new mortgage approved or refinance an existing one. In his role as a principal with Atlanta-based Urban Oasis Development, which builds both market rate and affordable housing, Dixon said he's not personally familiar with the intricacies of residential refinancing. However, he said he expects the terms of refinancing might be similar to those of getting a mortgage, where Black borrowers encounter difficulties.

"The Black community still doesn't have the same access to capital as everyone thinks," Dixon said. "In the economic boom of the past 12 years, and we know it was an uneven boom, those at the lowest levels tended to not participate as did those at the higher levels. I can't speak from personal experience about refinancing. I own my house and other properties with my wife. We didn't refinance. The larger story is that refinance requires access to capital, you have to have equity to refinance, and you have to have a credit score for a bank to want to refinance. Banks never got over the fears of 2008 to 2010 and were looking for scores in the high 600s, low 700s."

Coming out of the pandemic, credit scores for all groups were lower than those in the Atlanta Fed's 2020 report, according to an August 2021 report by Shift Credit Card Processing. Blacks in the United States had an average credit score of 677, down from the 715 the Fed reported. The score for Whites was 734, down from 752; Hispanics, 701, down from 730. Two groups not cited in the Fed's report, but are in Shift's report, are Asian, 745, and Other, 732.

Surveying pandemic-era policies

The July 2022 Policy Hub article concludes with an analysis of the strengths and weaknesses of three major policies enacted during the COVID-19 pandemic: forbearance, income support, and lower interest rates. The following summarizes their analysis.

  • Forbearance, which allows borrowers to defer a given number of mortgage payments to a future date with no penalty or fee, was "especially effective" across all groups because it was fast and easy to use. The only requirement was to attest to financial hardship due to the pandemic. Emerging evidence shows it was used by those in need and not used strategically by nondistressed borrowers. Forbearance "could be a useful tool" in a future crisis, provided that housing values don't collapse and the job market rebounds quickly. One downside was the liquidity squeeze for lenders who provided interest-free loans and had to await payments from government insurance and, eventually, borrowers.
  • Income support "clearly played a large role in alleviating financial distress" associated with debts related to housing, including mortgages and rent obligations, as well as vehicle loans and revolving credit lines. Support came through expanded benefits in unemployment insurance, stimulus checks, and the Paycheck Protection Program, with unemployment insurance payments being the most significant. Downsides of unemployment insurance payments included their slower delivery in comparison to forbearance, higher costs to taxpayers than forbearance, and fraud and abuse. However, given its purpose as an inclusive social insurance system, income support had the advantage of being both broad-based and able to "help to alleviate distress in both the rental and mortgage markets."
  • Reduced mortgage rates that resulted from the Federal Reserve's large-scale asset purchase program "did serve to reduce household financial distress," their research found. Lower interest rates spurred refinancing among many borrowers, easing their concerns over making mortgage payments. Drawbacks include the time it took for consumers to benefit from reduced interest rates, in part because of lenders' limited capacity to process loans and borrowers' tendency to delay applying for a lower rate. Also, the process is more involved than that of seeking a forbearance. These outcomes prompted the researchers' observation that the effectiveness of lower interest rates was "limited." A faster response, they suggest, could be achieved through wider use of adjustable-rate mortgages that could pass interest rate declines to consumers. They specifically cited as a "promising product" the so-called ratchet mortgage, which allows rates to be adjusted downward when rates fall but not upward as they rise.

The July 2022 Policy Hub article closes by noting that their research intended to explore the "merits and drawbacks" of policies implemented to ease pressures during the pandemic on mortgage borrowers, and the authors call for further research, noting that they "hope that future research using better data will add even greater perspective on what worked, and what didn't, during this tumultuous period."

David Pendered
David Pendered

Staff writer for Economy Matters