Mortgage Prepayment, Race, and Monetary Policy

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.

Policy Uncertainty and Bank Mortgage Credit

“…This low match rate is mainly because McDash overall contains a much smaller number of loans than HMDA. The McDash coverage varies over time and is especially poor before 2005 (Gerardi, Willen, and Zhang 2020). In addition, we lose two years of data because the McDash coverage starts in 1992 while our sample starts in 1990.…”

The Effect of Minority Bank Ownership on Minority Credit

“…We can perfectly identify marginal borrowers that are identical in every dimension (W * i , X * i ), except their race which was randomly given to them. In this ideal experiment, the minority bank-ownership effect would be consistent with reduced information asymmetry if: Gerardi et al (2020) document differences in prepayment rates across racial groups that can lead to differences in gain-on-sale. However, it is unclear if these differences exist for marginal borrowers.…”