Home lending to non-wealthy borrowers plummeted. Owners who missed out on pandemic-era refinance opportunities scrambled to find other ways to capitalize their homes.
Updated May 12, 2023, to add detail on missing borrower income data.
The spike in interest rates over the past year has had sprawling, complex and almost universally negative effects on the goal of inclusive homeownership. Lending to non-wealthy borrowers has fallen off a cliff, new federal data indicate – and among those who already own homes, the most vulnerable appear to be taking on unsettling amounts of risk as they navigate this trying moment in the housing market.
Key takeaways from an initial review of preliminary 2022 mortgage lending data include:
- Home lending to non-wealthy borrowers has plummeted over the past half-decade. Low and moderate income homebuyers were just 27.9% of all borrowers in 2022, far below the 37.9% of homebuyers they comprised in 2018.
- Homeowners who missed out on pandemic-era refinance (“refi”) opportunities are scrambling to find other ways to capitalize their homes. Rising interest rates have collapsed the home refinance frenzy but some households are still chasing that trend despite the highest interest rates we have seen in a generation.
- White borrowers appear to be better insulated from risk as historically high rates wreak havoc for others. Minority homeowners in particular have shifted to cash-out and home equity lending to access the equity in their homes, despite interest rates being at their highest point since 2002.
In 2022 rising interest rates slammed the door shut on homeowners hunting for the lowest APRs we have seen for a generation. Low and moderate income (LMI) borrowers are increasingly shut out of the market as they are squeezed between stubborn home prices and an increased cost of borrowing. As the refinance market has collapsed there are signs that desperate homeowners are still trying to pull equity from their homes despite the highest interest rates in twenty years.
That’s what stands out from new data released in April 2023 by the Consumer Financial Protection Bureau (CFPB). These modified loan application registers (LAR) for all lenders that report mortgage applications under the Home Mortgage Disclosure Act (HMDA) are preliminary data that may undergo some revisions and corrections before the final file is released in June. More detailed analysis will be possible at that time – but for now, market watchers can still dive cautiously into this preliminary data as a preview of coming attractions. Here’s what is remarkable so far:
A key event last year was the rapid increase in mortgage interest rates, which caught many mortgage professionals, including myself, off guard. At the end of 2021 the consensus was that rates would rise to as much as 4% in 2022. In fact, by November of 2022 the average rate of a 30 year fixed rate mortgage peaked at over 7%, nearly three times what it was in January of 2021.
The dramatic effects of rising interest rates on homeowner behavior are reflected in 2022 HMDA data. Regular refinance loans, where the borrower takes out no additional cash, plummeted from 5.2 million in 2021 to less than a million in 2022. Cash-out refis, where the borrower extracts equity from their home for something else, fell by half – from 2.7 million to 1.4 million loans between 2021 and 2022. Home purchase lending also declined to its lowest level in the last five years, with just 3.7 million homebuyers in 2022.
Low and moderate-income (LMI) borrowers – those with incomes less than 80% of the median income in their metro area – saw little change in their overall share of the market, dropping slightly from 29.7% in 2021 to 29.1% in 2022. This is far lower than the 36.6% of loans LMI borrowers received in 2018.
But it’s not necessarily the case that LMI lending was somehow unaltered by the rate spike, as these stats might seem to indicate. Those numbers are not the full story. From 2019 to 2021, as much as 20% of refinance loans lacked any data on borrower income. This is likely due to the prevalence of FHA streamline refinances and VA Interest Rate Reducing Refinances during this timeframe where income is not considered in the underwriting process. Under the current HMDA reporting rules this means borrower income, our only indication of the LMI status of the borrower, is not required. Loss of this fundamental data makes it difficult to accurately track whether loans are being equitably distributed to borrowers.
The newly released numbers provide some hope that this haze of uncertainty may begin to clear. Last year’s data includes borrower income for a dramatically higher share of lending – a promising shift, but one which also makes year-on-year comparisons artificially noisy. While it may appear as though LMI borrowers saw a meaningful increase in refinance lending in 2022 – the new numbers show a rise from 24.6% in 2021 to 32.6% in 2022 – it is more likely that refinances to LMI borrowers were always a larger share of loans than they appeared, and that the decrease in loans lacking income data reveals something closer to the real number. That said, in 2022 the percent of refinance loans lacking income data was 7.5% while home purchase and cash-out refi loans have this data 99% of the time.
In 2022, cash-out refi lending to LMI borrowers increased from 33.1% in 2021 to 35.5% of all loans, while upper-income borrowers experienced a decline of about the same amount. With rising interest rates, refinancing a loan to a higher rate is often not the best option unless it’s necessary due to life changes like divorce or bankruptcy. Upper-income homeowners who took advantage of the refinance market when rates were low are more likely to weather higher rate periods, as they often have other assets to rely on. Homeowners that were left unemployed during the pandemic often turned to home equity lending to pay bills or start businesses, something that would be a lot more difficult in 2022 than in the previous years of the pandemic.
The most concerning area in the 2022 data is home purchases. LMI home buyers experienced a significant decline in their market share, falling to just 27.9%. This is about 7 percentage points less than in 2021 and far below the 37.9% of the homebuyer market that LMI borrowers had in 2018.
Across both refinance and home purchase lending in 2022, the share of loans made in LMI census tracts—where the median family income is less than 80% of the median family income for the metro area—increased marginally.
This is likely due to a number of factors. As interest rates declined, homeowners in higher income areas rushed to lock in historically low interest rates. Then as rates rise, we should expect those borrowers to leave the market, increasing the share of lending in lower income neighborhoods. Note the particularly strong increases in refinance and cash-out refinance lending in LMI census tracts. With interest rates two and a half times what they were at the start of 2021 few homeowners will find it advantageous to refinance unless they are in a position where their home is the only source of equity they have.
In 2022, lending to minority borrowers (anyone other than a non-Hispanic White applicant that reported a race or ethnicity) rose from 23.7% of all loans in 2021 to 25.2%. Compared with 21.9% in 2018, this substantial increase is primarily driven by home purchase lending. Non-White home buyers made up 25.2% of the market in 2018 and 30% in 2022.
A closer look at the specific race of borrowers reveals distinct patterns between Black and Hispanic borrowers and their Asian counterparts. As we noted last year in our report on 2021 HMDA data, Asian applicants are predominantly higher-income Chinese and Asian Indians. These borrowers often secure more loans and pay less for them than other groups. We observed a continuation of the growth of home purchase lending to Asian borrowers, increasing from 7.4% in 2021 to 8% in 2022. In contrast, Black and Hispanic lending remained virtually unchanged from last year, at 8.1% and 13.1% of all home purchases, respectively.
As interest rates rose, refinance lending saw a massive exodus of Asian borrowers, with only 4.8% of all refinances going to an Asian applicant in 2022—nearly half of their share of the refinance market in 2021. Cash-out refinance also experienced a significant reduction of Asian borrowers, with just 3.2% of borrowers in 2022.
In 2022, the Home Mortgage Disclosure Act (HMDA) began using the 2020 Census data and census tract boundary lines. Every ten years, the US Census Bureau redraws tract boundaries to account for neighborhood-level population shifts. They also revised some questions on the Census form, including those related to race. By making it easier for respondents to identify themselves, the 2020 Census saw a considerable increase in people considering themselves multi-racial, from 9 million in 2010 to 33.8 million in 2020. The increase in minority population resulted in the number of FHFA minority census tracts increasing from 24,364 in 2012 to 30,080 by 2022.
As with the substantial change in borrower income data in the new numbers, this mandatory update to geographic boundaries in 2022 HMDA reporting should give analysts pause when making year-on-year comparisons. While the new numbers may appear to show a fascinating one-year leap in the percentage of loans made in majority-minority tracts – up to 24.3% last year from 19.7% in 2021 (a figure that changed very little since 2018) – celebrations would be wildly premature. This shift is likely driven more by census boundary changes than any actual increase in lending to minority neighborhoods.
The 2022 HMDA data reflects mortgage lending in a challenging time, with rising rates and persistently elevated home prices. As the cost of borrowing increases, we would expect home prices to level off or even decline. However, we’re not seeing this happen, likely due to the large number of investors active in the market. Simultaneously, builders aren’t producing homes for LMI borrowers either. The “starter home” seems to be a thing of the past.
This prompts some critical questions: Can we build our way out of this situation? How can we make it easier for LMI home buyers to get a loan when their options are so limited? It’s essential to continue analyzing and understanding these trends to identify potential solutions that can benefit homebuyers and lenders alike. Building alone won’t accomplish a rebalancing of the market. Banks and policymakers must make it easier for first time buyers to get mortgages, whether via interest rate buydowns, down payment support or some other solution that incentivizes builders to again focus on this end of the market.
In June when the CFPB releases the final 2022 HMDA file we will release a more detailed analysis of the 2018-2022 trends in lending. But for now it is clear that 2022 saw the gold rush driven by historically low interest rates grind to a halt. The true impact of this rapid shift in the market on LMI borrowing and on communities of color has yet to be fully understood.
Jason Richardson is Senior Director of Research at NCRC.
Photo by Blake Wheeler on Unsplash. Thanks to David Skanderson for insight on missing borrower data.