Kristopher Gerardi, Paul Willen, and David Hao Zhang
Working Paper 2020-22
December 2020

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Abstract: During the period 2005 to 2020, Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were almost 50 basis points higher than those paid by non-Hispanic white borrowers. We show that the main reason is that non-Hispanic white borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic white borrowers face challenges refinancing because, on average, they have lower credit scores, equity, and income. But even holding those factors constant, Black and Hispanic white borrowers refinance less, suggesting that other social factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs that more directly pass through interest rate declines to borrowers can reduce racial mortgage pricing inequality.

JEL classification: G51, E52, D14

Key words: mortgage, refinance, race, monetary policy, interest rate

The authors thank Manuel Adelino, David Berger, Neil Bhutta, Scott Frame, Andreas Fuster, Ed Glaeser, Lauren Lambie-Hanson, Joe Peek, Geoff Tootell, Joe Tracy, Larry Wall, Christina Wang, Jon Willis, and attendees of the 2020 Atlanta Fed/Princeton Bendheim Conference on Racial Justice and Finance for helpful comments. The authors especially thank Daniel Sexton for his excellent research assistance. The opinions expressed herein are those of the authors and do not represent the official positions of Black Knight Inc., Equifax, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Boston, or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Kristopher Gerardi, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309; Paul Willen, Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA 02210; or David Zhang, Harvard Business School, Soldiers Field Road, Boston, MA 02163.

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