Stuck in Subprime? Examining the Barriers to Refinancing Mortgage Debt

Abstract

Despite falling interest rates and major federal policy intervention, many borrowers who could financially gain from refinancing have not done so. We investigate the rates at which, relative to prime borrowers, subprime borrowers seek and take out refinance loans, conditional on not experiencing mortgage default. We find that starting in 2009, subprime borrowers are about half as likely as prime borrowers to refinance, although they still shop for mortgage credit, indicating their interest in refinancing. The disparity in refinancing is driven in part by the tightened credit environment post-financial crisis, along with the fact that many subprime borrowers are ineligible for the Home Affordable Refinance Program (HARP), which is the major policy initiative designed to assist borrowers in refinancing their mortgages. We argue that these barriers to refinancing for subprime borrowers have long-term implications for social stratification and wealth building. These concerns are exacerbated by an additional finding of our work that refinance rates have been significantly lower for black and Hispanic borrowers, even after controlling for borrower credit status.