The Refinancing Transition: Equity Extraction, Income Constraints and Subprime Refinancing Among CRA Mortgage Borrowers

Publication Date

May 2009

Author(s)

Client/Funder

Ford Foundation

Abstract

The rise of risk-based pricing altered the context surrounding targeted lending programs. The growth of the subprime industry not only created competition for purchase mortgage originations, but also introduced refinancing options available to existing borrowers.

This article focuses on the refinancing decision, following a sample of community reinvestment borrowers through the first years following home purchase. While the majority of refinancing borrowers secured lower-cost prime loans, a minority refinanced into adjustable-rate mortgages and into products with above-prime interest rates.

The analysis examines these latter transitions, exploring the extent to which the desire to tap accumulated equity explains the observed refinancing behaviors. The empirical evidence supports the distinction between rate and cash-out refinancing, suggesting that the desire to extract equity offers an economic rationale for transitions into subprime products through refinancing.