Refinancing Inequality During the COVID-19 Pandemic

We study the distribution of savings from mortgage refinancing across income groups during the COVID-19 pandemic. Between February and June 2020, the difference in savings from refinancing between high- and low-income borrowers was ten times higher than before the pandemic. This was the result of two factors: individuals in the top quintile of the income distribution increased their refinancing activity more than comparable borrowers in the bottom quintile and, conditional on refinancing, they captured slightly larger improvements in interest rates. Exploiting idiosyncratic variation in COVID-19 case rates within zip codes over time, we find that changes in local economic conditions explain up to 74 percent of the increase in refinancing inequality tied to the pandemic. Using data on refinancing applications and funding rates we find that, conditional on applying, the funding rates and processing times for low-income borrowers were not differentially affected by the pandemic. Instead, low-income borrowers were underrepresented in the pool of applications. We estimate a difference of $5 billion in savings from refinancing between the top quintile of the income distribution and the rest of the market. This discrepancy has implications for the transmission of monetary policy and the evolution of wealth inequality.