Racial Disparities in Mortgage Refinancing: Can Technology Repair the Link Between Homeownership and Wealth?

• In Event: Home Equity and Wealth Building

Abstract

Racial disparities in the ability to build and extract home equity play a significant role in shaping the racial wealth gap. Prior scholarship consistently finds racial and ethnic disparities in access to mortgage credit and discrimination during the home purchase process. However, the importance of home mortgage refinancing – a process through which homeowners can increase their wealth over time by lowering the cost of their mortgage credit, or extract home equity to be used for investments and savings – has received considerably less attention. A small body of research finds evidence of racial and ethnic disparities in the mortgage refinance market, but these studies do not investigate whether variation exists across lender types. The present study asks whether fintech lenders – a rapidly growing class of online, technology-driven lenders that have a larger presence in the refinance market than the home purchase market – differ from traditional brick-and-mortar lenders in their refinance lending patterns across racial and ethnic groups. Given prior findings that fintech lenders, relative to traditional lenders, offer racial and ethnic minorities favorable loan outcomes in certain contexts, a closer examination of fintech’s role in the refinancing market is warranted. 

To examine this topic, this study leverages a novel dataset categorizing lenders as traditional or fintech, loan and applicant characteristics from over 11 million refinance loan applications provided by the Home Mortgage Disclosure Act between 2018 and 2020, and an array of regional and neighborhood-level covariates. These data are used to specify a series of econometric models determining whether similarly-qualified applicants from different racial and ethnic backgrounds are able to refinance their home mortgages with equal rates of approval and similar loan terms. Separate models are estimated for general refinance and cash-out refinance applications, respectively.

Findings indicate that Black and Latino, and to a lesser extent, Asian borrowers face disadvantages compared to similarly qualified White borrowers in the mortgage refinance market. However, fintech mortgage lenders, relative to traditional lenders, offer non-White applicants more equitable loan approval decisions and lower interest rates, especially in the case of Black applicants. These patterns are even more pronounced among applicants for cash-out refinance loans, which are a key mechanism through which home equity is made liquid. Results suggest that technology-driven lending can be an effective channel through which racial and ethnic minority homeowners can access refinance loans. This enhanced ability to refinance a mortgage loan, and in some cases extract home equity, could play an important role in reducing the racial wealth gap.

Author

• Tyler Haupert, New York University Shanghai
  Presenting Author