During the COVID-19 pandemic, many borrowers rushed to refinance their mortgages as mortgage rates plummeted. I remember getting a text from my friend whose dad originated the mortgage on my home that said something along the lines of, “My dad wanted me to let you know that this is a great time to refinance.” Mortgage rates fell to a record low of 2.72% at one point in 2020, and many borrowers who were in a position to refinance decided to do so (Market Watch). We were not in a position to refinance and instead chose to put our loan into forbearance.
When you refinance a mortgage, you go to a lender and ask them to rewrite your loan. You might do it because you want a better interest rate, or you might do it because you want to extend the term of your loan to negotiate a cheaper monthly payment. When interest rates dropped in 2020, a lot of people who had mortgages rushed to take advantage of these lower rates (WSJ).
But Black borrowers were significantly less likely to refinance their homes during the pandemic. They were also more likely to fall behind on payments. This is due in part to Black people having lower credit scores and higher loan-to-value ratios (BankRate, Federal Reserve Bank of Boston).
TAKE ACTION
• Consider doing business with Black-owned community banks instead of large banks. You can find a list of Black-owned banks and credit unions here.
• Take action with the National Fair Housing Alliance by signing their petition to Congress to submit the key housing measures in the Reconciliation Bill.
Though credit scores seem impartial, decisions about how they’re calculated aren’t. Many times, making monthly mortgage payments improves your credit score but timely rental payments do not (Washington Post). Less than half of Black Americans own a home compared to two-thirds of white Americans (BankRate). Black people are more likely to be tenants, who are hindered from getting mortgages by not having credit scores raised by paying a mortgage in the first place.
Black and Latine borrowers who already have mortgages in general are less likely to refinance their mortgages for more favorable conditions (Consumer Reports). In 2020, Wells Fargo approved only 47% of refinancing applications for Black borrowers in comparison to 72% of white borrowers (Bloomberg). When Black homeowners do try to refinance, there is evidence that their property values are appraised at much lower rates than that of their white counterparts (The ARD). In one incident, a couple wanted to take advantage of low refinance rates and had their home appraised much lower than expected. When the family removed their family photos that featured the Black wife and mixed-race kids and replaced them with oil paintings of the white husband, an appraisal came back more than $100,000 higher. This couple’s situation is not unique: Black homeowners report lower appraisals, even in predominantly white neighborhoods where home values are high (NYTimes). Black and Latine individuals are less likely to even try to acquire or refinance a mortgage because of mistrust of banks with long histories of racism (Center for American Progress).
When the Federal Housing Administration was formed in 1934, it enacted a policy known as redlining where it refused to insure mortgages in Black neighborhoods. While white Americans were using their home equity to send their children to college, Black Americans did not have this privilege (NPR).
In recent years, Bank of America, Wells Fargo, and Chase have all committed to dedicating resources to a push to increase Black homeownership through lending and investment in Black-owned community banks. In some ways this is helpful: renters experience more inequality and less stability than homeowners and the ownership of land turns a dwelling into a profitable enterprise rather than simply a home (The ARD).
But this commitment only comes after decades of community pressure on financial institutions to better serve underrepresented communities (Washington Post, Bloomberg). One of the chief causes of the 2006 housing boom and the subsequent 2008 financial crisis was banks offering Black borrowers predatory subprime mortgages, even when they had good credit and higher incomes subprime loans (Bloomberg CityLab).
New initiatives to push homeownership do not help much if the lenders are refusing to refinance the same communities they claim to serve. One course of action to take is to consider doing business with Black owned-banks. It’s important to note that you may get a better mortgage rate if you are seeking to refinance if you go to these smaller institutions (Investopedia). It is also important to take action by supporting organizations such as the National Fair Housing Alliance and other community organizations that are doing the work to create equity in homeownership.
KEY TAKEAWAYS
- Black Americans were less likely to take advantage of the Covid refinancing boom, and those who attempted to were less likely to be approved.
- Historic redlining significantly contributed to the income gap between Black Americans and there is a significant homeownership gap between Black and white Americans.
- While large banks are committing to push homeownership for Black Americans, their approval rates don’t necessarily reflect those commitments.