Samantha: Hello, this is Samantha Shares.
This episode covers the Prepared Remarks of CFPB Director Rohit Chopra
at the National Housing Conference
SEPTEMBER 9, 2024
The following is an audio version of those remarks.
This podcast is educational and is not legal advice.
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And now the remarks.
Prepared Remarks of CFPB Director Rohit Chopra at the National Housing Conference
SEPTEMBER 9, 2024
Interest rates are a major driver of decision-making in our economy.
In board rooms and at kitchen tables, many are wondering how much todayâs
high interest rates will fall.
For families, interest rates are often what makes or breaks
the math on their mortgage.
Today, I want to discuss mortgage refinancing, and whether falling
interest rates will actually translate into tens of billions of dollars
of savings for existing homeowners.
First, Iâll discuss the state of play and the outlook for the mortgage
refinancing market, including the stakes of refinancing in the coming months
for both homeowners and the economy.
Then, Iâll discuss some of the obstacles and complexities that homeowners and
lenders face, like high closing costs.
Iâll close with some steps that the CFPB and the marketplace
should take to ensure that families donât miss out on falling rates.
My remarks today do not constitute legal interpretation,
guidance, or advice of the CFPB.
Any opinions or views stated are my own and may not represent the views
of the CFPB or Federal Reserve.
Todayâs Mortgage Refinancing Market and the Expectation of Lower Rates Ahead
While we often focus on homeownership as a vehicle for accumulating
wealth, a well-timed mortgage refinance can make a major difference
in a familyâs financial life.
During the pandemic, mortgage interest rates fell to new lows in 2021.
Many families buying a home were able to lock in rates below 3 percent and,
unsurprisingly, the mortgage industry generated massive volumes of refinancing
savings for homeowners who had the credit profile, the income, and the home equity
to take advantage of the opportunity.
Researchers at the Federal Reserve Bank of Boston found that total consumer
savings from mortgage refinancing from January 2020 to October 2020, during
the refinancing boom, was $5.3 billion annually, with the typical household
saving $279 a month, which adds up to thousands of dollars per year.
But after a series of rate increases by the Federal Reserve, mortgage
interest rates in October 2023 hit highs not seen since 2000.
Rates have risen over five percentage points since bottoming out in
January 2021 at 2.65 percent, peaking at 7.79 percent in October 2023.
Since then, rates have eased to 6.35 percent as of last year.
A mortgage payment on a $400,000 loan is $877 higher
today compared to January 2021.
A homebuyer who took out a $400,000 mortgage in January 2021 paid roughly
$1,600 a month in principal and interest.
That same mortgage would cost nearly $2,500 a month today.
Unsurprisingly, the refinance volume for the first half of 2024
was the lowest in nearly 30 years.
Currently, more than a fifth of all mortgages have interest
rates above 5 percent.
Of these 12.2 million mortgages, 7 million are above 6 percent and
approximately 60 percent of those were originated in the last two years.
That means that as interest rates decline, millions of borrowers
could benefit from refinancing.
One analysis suggests that about 2.5 million borrowers could refinance
at todayâs rates and see their interest rates decrease by at
least three quarters of a percent.
If interest rates fell another point to 5.5 percent, more than 7 million
borrowers could potentially benefit.
Further reductions would increase the addressable market even further.
Using predicted interest rates derived from futures markets, I
expect that mortgage refinancing will increase modestly in the
near-term and then more rapidly.
The potential for refinancing has significant implications
for economic growth as well as for individual homeowners.
Refinancing frees up homeownersâ finances to engage in other types of spending.
As a result, a meaningful increase in refinance activity could
represent billions of dollars in additional economic activity.
However, the CFPB is concerned that many homeowners will not
benefit from the lower rates.
According to some analyses, in past refinancing cycles, minority homeowners
were less likely to benefit, even when considering differences in income,
home equity, and credit profiles.
We also know that incentives in the market tend to favor refinancing higher balance
mortgages, leaving out many homeowners from less affluent neighborhoods.
Consider that while millions of homeowners locked in historically low rates in 2021,
millions of other borrowers did not, either by choice or by circumstance.
For some, that missed opportunity represents thousands of dollars each year.
Ensuring that a broad swath of homeowners can benefit this
time around will be critical.
Obstacles to Refinancing
Since the mortgage crisis, the CFPB, our colleagues across the Federal
Reserve System, and other agencies have closely looked at borrower
behavior in the mortgage market.
As many of you know, the decision to refinance can often feel fraught.
There are many questions homeowners might mull over before refinancing,
like whether rates will fall further, whether to take out cash, or how changes
in their income will affect their rate.
But there are two main factors that make this decision so
difficult: cost and complexity.
The expense and burden of the refinancing process makes the decision
far more consequential for homeowners, and serve as a barrier to robust
refinancing in a lower rate environment.
The CFPB is concerned that closing costs can prove to be a
significant obstacle to refinancing.
Closing costs are the set of fees that are charged to the borrower
when a mortgage is finalized.
For purchase mortgages, we know that excessive closing
costs can drain a downpayment.
For refinance mortgages, closing costs also have high stakes.
Because they can add up to several percentage points of the total mortgage
amount, this means that it wonât make sense for borrowers to refinance unless
the offered interest rate is substantially lower than their current rate.
In other words, these one-time charges can cancel out the savings from
a small or modest rate reduction.
Advocates for high closing costs defend the status quo on the
basis that costs are disclosed.
Federal law and regulations require closing costs to be disclosed,
but this seems to miss the point.
Disclosure helps consumers compare, but many of the fees are not
subject to robust competition.
While it is better to disclose a rip-off than to hide it,
it may still be a rip-off.
Indeed, we have found instances of monopolistic practices that
drive up closing costs on items like credit reports, FICO scores,
and employment verification.
Many borrowers looking to refinance are particularly puzzled when it
comes to purchasing a new title insurance policy for their lender that
sometimes costs thousands of dollars.
Even though these borrowers typically do not lose their ownerâs title insurance if
they purchased a policy when they bought their home, the policy does not carry
over to a new lender when they refinance.
The CFPB believes that this and other closing costs are harmful to both
lenders and borrowers, given how they reduce the pool of mortgages
that can benefit from refinancing.
Lenders face other obstacles for refinancing, too.
For example, under existing law and under certain investor requirements, lenders
are required to redo some of the same steps that were completed by the borrower
when they first purchased their home.
While the cost of many of these steps may be falling with greater
automation and artificial intelligence, the repeated steps add complexity
and the potential for errors.
There may be more pernicious barriers to refinancing as well.
For example, disparities in refinance activity for Black homeowners raise
a number of potential questions, including questions about the use of
artificial intelligence in the marketing, appraisal, and underwriting processes.
CFPB Actions
To prepare for the easing of interest rates, the CFPB launched an effort to find
ways to spur more mortgage refinancing.
We also separately solicited public input on ways to reduce
the burden of closing costs.
We received a wide range of input, and we are pursuing a number of steps.
Here are a few of them:
First, the CFPB will be closely watching the implementation of new mortgage
technology, including applications marketed as utilizing artificial
intelligence.1 There are some novel uses of data, including generative AI,
in many stages of the mortgage process.
Advances in technology have the potential to help lenders lower
costs and reach more individuals who could qualify for refinancing.
We want to see this work in ways that benefit borrowers and the economy.
However, if executed poorly, new mortgage technology could exacerbate
disparities or make people worse off.
We are on the lookout for how new mortgage tech can contribute to discrimination,
collusion, or other illegal activity.
We have repeatedly made clear that there is no âfancy technologyâ exception in our
consumer protection and fair lending laws.
In addition, we have finalized new rules on algorithmic appraisals.
Importantly, the CFPB now has technologists embedded across
our functions, and we are more prepared than ever to identify
and prosecute violations of law.
Second, the CFPB is exploring whether we should make certain changes to
the existing mortgage regulations to streamline the refinancing
process and to reduce closing costs.
When an existing or competing lender is seeking to refinance a loan with a much
lower rate for a substantially similar mortgage, it may not be worthwhile for the
lender to repeat many of the steps that were taken during the purchase process.
We are especially interested in the costs and time taken to refinance a mortgage
that are exclusively related to complying with federal mortgage law, rather than
steps that are demanded by investors.
We will also be identifying ways to jumpstart competition in various
closing costs, which can also help spur refinancing activity.
Third, the CFPB is pursuing rules to accelerate the shift to âopen
bankingâ with mortgages in mind.
Next month, I expect we will finalize our initial rule on Personal Financial
Data Rights, under Section 1033 of the Consumer Financial Protection Act.
This initial rule will empower people to permission their personal financial data
to lenders in ways that will reduce the costs of underwriting over the long term.
Mortgage lenders would also have greater ability to use a familyâs cash flow
in the underwriting process, since borrowers could more easily share
data on their income and expenses.
After this initial rule, I expect there to be additional rules to
cover more use cases for open banking, including for mortgages.
I am especially interested in ways consumers could more easily permission
other types of data, such as their credit score, rather than making
every competing lender purchase it.
Of course, we are also putting greater thought into and conducting analysis
on product features and practices that could further reduce the friction
homeowners face when seeking to achieve a lower mortgage rate or payment.
These actions will complement other efforts across the
housing and regulatory agencies.
Conclusion
In closing, markets are predicting that interest rates are headed downward.
With next weekâs September meeting of the Fedâs Federal Open Market Committee,
many in the housing industry are focused on whether lower interest rates will
help to spur more construction of units in markets facing supply shortages.
But there is a significant open question about whether the benefit of
lower interest rates will alleviate the high monthly costs of mortgages
for those with high rates, including those taken out in recent years.
If we can collectively refinance millions of mortgages in neighborhoods across
the country, it will be a huge boost for those families and their local economies.
This concludes the prepared remarks of the C F P B.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.