Home Mortgage Lending by Race and Income in a Time of Low Interest Rates: Examples from Select Counties in Kentucky, Ohio, and Pennsylvania from 2018 through 2021

Home mortgage denials

Denial rates declined in nearly every race and income category across the seven counties and in the nation from 2018 through 2021 (Figure 2). However, denial rates for Black applicants (blue lines) are consistently higher by around 7 percentage points than for non-Black applicants (green lines). This racial gap in denial rates is well-documented, but several recent papers have attempted to explain this issue using the confidential HMDA data set, which includes applicants’ credit scores (Bhutta, Hizmo, and Ringo, 2021; Ky and Lim, 2022; Popick, 2022). When controlling for credit score, as well as other variables such as debt-to-income (DTI) percentage and loan-to-value (LTV) ratio, the researchers found that the denial rate gap shrunk to 1.9–2.9 percentage points. This remaining gap could be due to discrimination, but the researchers also acknowledge that unobservable risk factors missing from the data could also be driving lenders’ decisions. Such factors include applicants’ liquid reserves, residency and employment stability requirements, bankruptcies, and previous foreclosures.

Public HMDA data include some reasons for denials, and financial institutions can select up to four from a list of nine reasons for each application. For this report, denial reasons were aggregated by borrower race and income for the seven counties during 2018–2021, then ranked. Across race and income groups, the three most common reasons households were denied a mortgage loan were collateral, credit history, and DTI. Collateral refers to the home’s value being less than the proposed loan amount. DTI is the applicant’s monthly debt payments divided by their gross monthly income. Lenders generally look for a DTI between 28 and 36 percent. For LMI applicants, DTI was the top reason for denial. These three reasons were similar when compared across race and income. However, credit history, a record of how debts were managed, was a more prevalent reason for Black applicants and collateral was a more prevalent reason for non-LMI, non-Black applicants (Figure 3).

Refinances

Record-low interest rates spurred massive increases in refinance originations as homeowners looked to lower monthly payments or tap into their homes’ equity. Overall, refinance originations for the seven counties increased 269 percent from 2018 through 2021 (26,532 to 98,033), while the nation saw an increase of 295 percent (Table 2). Non-Black homeowners saw a larger increase in refinances both within the seven counties and in the nation as a whole. 

Source: Home Mortgage Disclosure Act data

Figure 4 indexes the refinance originations for the seven-county average and the nation as a whole. For non-LMI, non-Black homeowners (dashed green line), the trend was a sharp increase in 2020 followed by a slight decrease in 2021. For Black homeowners (both LMI and non-LMI, blue lines) and LMI non-Black homeowners (solid green line), the trend was a steady increase from 2018 through 2021. Interestingly, in the seven counties from 2020 through 2021, Black homeowners saw refinances increase at a greater rate than non-Black homeowners (69 percent compared to 7 percent). This was particularly true for LMI, Black homeowners, who saw increases of 91 percent compared to 34 percent for LMI, non-Black homeowners.

Though refinances increased dramatically, not all homeowners took advantage. Given the low interest rate environment in 2020 and 2021, it is interesting to see the fluctuations in refinance rates and to consider what would cause homeowners to forgo a process that could lead to such financial savings. Several researchers have developed possible answers to that question. First, refinancing is a complex financial calculation that requires significant borrower time and effort (Keys, Pope, and Pope, 2016; Agarwal, Rosen, Yao; 2016). Some homeowners are suspicious of financial institutions’ motives and may also be confused about the differences between the lender and the servicer and do not understand that each has different incentives for encouraging refinancing (Johnson, Meier, and Toubia, 2019). Another reason is related to neighbor influence and proximity. Owner-occupied households are less likely to refinance if their immediate neighbor did not refinance (McCartney and Shah, 2022). Additionally, low-income borrowers were often not solicited. And though researchers did not find evidence that lenders prioritized high-income borrowers, they found that low-income borrowers were underrepresented in the 2020 application pool (Agarwal et al., 2021). One final reason is related to forbearance. During the COVID-19 pandemic, forbearance—a promise by lenders to take no action against borrowers who miss payments—was extensively granted under the 2020 CARES Act. Although it varies by home loan type, most mortgages require homeowners to make three consecutive payments after exiting forbearance before they can refinance. Borrowers who entered forbearance and remained behind on payments during the pandemic may not have been able to refinance and benefit from the record-low interest rates. Unfortunately, this means that borrowers who likely would have been most helped by refinancing may have been the least able to (Gerardi, Lambie-Hanson, and Willen, 2021).

Refinance denials

Similar to home mortgage denials, from 2018 through 2021, refinance denial rates declined for all race and income groups. And like home purchases, denial rates for Black applicants (blue lines) remained consistently higher than for their non-Black counterparts (green lines) (Figure 5). However, from 2018 through 2021, the gap between Black denial rates and non-Black denial rates narrowed in both the seven counties and the nation as a whole.

Denial reasons were aggregated by applicant race and income for the seven counties during 2018–2021, then ranked (Figure 6). Collateral and credit history were the most common reasons for both LMI and non-LMI applicants, but Black applicants, regardless of income, were more likely to be denied for credit history than non-Black applicants.

Conclusion

During the past few years, the housing market has experienced an exceptional combination of events. Mortgage interest rates reached historic lows, increasing demand for buying homes and refinancing mortgages. At the same time, a pandemic-induced economic shutdown and an increase in remote work caused households to rethink their living arrangements. Together, these events helped create a nationwide situation of high demand and low supply. It is a unique situation, lacking precedence. With that in mind, in this report, I examined mortgage lending in seven large Fourth District counties from 2018 through 2021.⁵ In the seven counties, there was strong growth in the number of home purchases by Black borrowers (both LMI and non-LMI), a situation that led to the Black homeownership rate increasing by 2 percentage points. However, the gap between Black and non-Black homeownership rates remains wide at 30.7 percentage points.

Historically low interest rates drove a surge of refinances, primarily for non-LMI, non-Black homeowners. But from 2020 through 2021, the number of refinances for Black and LMI homeowners increased at a faster rate than that of non-LMI, non-Black homeowners. With interest rates at historic lows, it is worth exploring why some homeowners choose not to refinance, particularly when refinancing a mortgage can save a homeowner thousands of dollars over the length of the mortgage. Recent studies uncovered several reasons: refinancing is a complex financial calculation, some homeowners are unaware of interest rate trends, some homeowners are suspicious of financial institutions’ motives, homeowners are often influenced by their neighbors’ refinancing actions, low-income borrowers are not solicited, and pandemic-related forbearance affected refinance rules. As mortgage interest rates have begun to rise, the refinance boom has subsided, and home sales have declined. It remains to be seen whether the upward trends will continue for Black and LMI borrowers seeking to purchase or refinance a home.