It’s certainly a bad time to refinance your mortgage. Rates for 30-year-mortgages are the highest they’ve been in decades. But not too long ago, during the 2020 pandemic, rates dropped to below 3%, and it was a good time to refinance.
About $14 trillion of outstanding mortgages were refinanced then. Lenders did well and built strong cash positions on their balance sheets. Most consumers also did well, locking in low fixed-rates that will cushion them through this cycle of high interest rates and inflation.
But here’s the problem: Millions of low- and moderate-income Americans didn’t refinance and are now stuck with costly mortgage payments.
It’s a myth that banks and lenders somehow neglected to refinance the loans of Americans who have fewer means. Or in financial parlance, those in the low-to-moderate income (LMI) segment. But that isn’t correct. When rates are low, lenders enjoy a booming refinancing business. Phones ring off the hook as homeowners seek to refinance their mortgages and take advantage of lower rates.
This LMI group has the most to gain by refinancing. The rising cost of living has made it difficult for many Americans to keep up with their mortgage payments. This is particularly true for LMI families, who often have trouble finding enough money to cover their monthly expenses.
If they had locked in lower rates during the pandemic years, they would have more money now during this period of high inflation. Unfortunately, LMIs aren’t as proactive in calling their lenders to refinance. Many don’t know they have the option to refinance. Many LMIs don’t actively monitor interest rates.
Every public administrator I meet seems to worry about this problem. Every lender wants to do more. There has to be a meaningful private-public partnership to tackle this problem. We need leaders from public agencies and private lenders to start discussing ways to solve this problem now so we can get ahead of the next refinancing wave.
We in the housing industry can draw upon recent experiences with mortgage forbearances during the pandemic. As many Americans lost their jobs, they also grew concerned about losing their homes because they couldn’t make the monthly payments. Losing your job shouldn’t mean losing your home. Many lenders, including the company I led at the time, provided forbearance options, a mechanism where homeowners could establish a plan where they defer payments.
We went further. We made it easy for homeowners to interact with us. We created a single point of contact so that any homeowner who called would interact with the same representative. Let’s be honest: the refinancing process is complicated, confusing, and expensive. You can ignore those lenders who say they’ve “streamlined” the refinancing process: The mortgage refinancing process is as streamlined and enjoyable as getting a tooth removed without painkillers.
Homeowners have to go through the full process: application; documentation; underwriting, appraisal. Then they have to dish out large fees for applications and closing costs to refinance. High fees are often a constraint for the LMI segment. It makes the process easier for the homeowner when they can deal with a single representative.
Second, we let customers know about forbearance and loan modification plans. We emailed and called our customers regularly so they knew about the plans. We worked in tandem with community nonprofits and housing counselors to spread the word.
Lenders now should be proactive about helping the LMI community. Industry executives and representatives at the U.S. Department of Housing and Urban Development (HUD) could partner to enlist financial counselors and social workers to educate LMI borrowers about refinancing.
We must find a way to bring financial counselors into LMI neighborhoods to help borrowers understand closing costs and help them achieve low mortgage rates. Counselors can help families identify whether they should refinance and how much they could save if they did. They can also help families determine whether they should pay off their credit card debt or use that money to lower their monthly mortgage payments.
Lenders are typically obsessed with helping people buy new homes. This obsession should extend to helping folks stay in the homes that they buy — especially Americans with fewer means — by taking advantage of lower rates when the time comes.
Sanjiv Das is a former CEO of Citi Mortgage and Caliber Home Loans.
More: Whom do you blame for high house prices? Nearly half of young Americans are pointing a finger at the government.
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