Mortgage Prepayment, Race, and Monetary Policy


Gerardi, Kristopher, Paul Willen, and David Hao Zhang. Working Paper. “Mortgage Prepayment, Race, and Monetary Policy”.
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Black and Hispanic homeowners pay significantly higher mortgage interest rates than Non-Hispanic White homeowners. We decompose the racial rate gap into (1) higher rates charged to Black borrowers at origination and (2) racial disparities in the timing of originations. We show that the latter explains most of the gap and is driven by racial differences in mortgage prepayment behavior. Non-Hispanic White borrowers are more mobile and are more likely to exploit falling interest rates by refinancing their mortgages. Observable borrower and mortgage characteristics like income, credit scores, and loan-to-value ratios explain most of the differences in prepayment behavior by race. By driving down mortgage rates, monetary expansions such as the first quantitative easing program (QE1) exacerbates the racial rate gap by disproportionately benefiting Non-Hispanic White borrowers. Alternative mortgage contract designs to the standard fixed-rate mortgage with rate originated above mortgage-backed securities yields may have desirable distributional implications across racial groups.

Last updated on 10/31/2020