As interest rates on new mortgages have crept up over the past two years, borrowers who did not refinance during the low-interest period are increasingly locked into their high monthly payments. These borrowers—who are disproportionately people with low incomes and people of color—often neglected to refinance because of three major barriers in the refinancing process: the cost and hassle of refinancing, additional fees, and lack of information.

Research has shown that most of the mortgage rate differential between Black and white borrowers stems from Black borrowers’ lower propensity to refinance, not the rate they received at mortgage origination. Thus, reducing the three major barriers to refinancing through administrative action can narrow the racial homeownership gap.

Today’s high-rate environment offers policymakers and housing agencies an ideal window to address these barriers and make homeownership more sustainable and equitable. With few borrowers currently in the refinancing queue and interest rates needing to fall several percentage points to entice borrowers to refinance, agencies can make changes now and minimize market disruptions.

Streamline the existing process to reduce the hassle factor and third-party fees

First, a refinance loan is treated as a new loan—borrowers must document income and prove creditworthiness, and the loan often requires an appraisal and title insurance. Thus, refinances are costly because of the lender time required and the thousands of dollars in third-party fees, not to mention the borrower’s time spent gathering documentation. Even worse, these requirements exclude many borrowers, who might have had spells of unemployment, did not experience home appreciation, or hurt their credit score.

The Consumer Financial Protection Bureau (CFPB), Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs), and the Federal Housing Administration (FHA) could fix this issue by streamlining its existing process to recognize that the credit risk bearer already holds the loan risk and the refinance will lower the cost to the borrower, making the loan safer. To do so, the CFPB can change the refinance process within its ability-to-repay/qualified mortgage rule, which requires lenders make a good-faith determination of a borrower’s ability to repay the loan. Streamlining the process could allow the lender to refinance as long as it benefits the borrower. What counts as beneficial (e.g., substantially lowered interest rates or monthly payments) would need to be strictly defined.

The GSEs and the FHA could then reform their underwriting systems to automatically approve refinances on loans these entities already back, ideally using the same standard the CFPB uses. The GSEs would have to give representation and warranty relief to servicers in the event of a rate-term refinancing, and mortgage insurance companies would need to view the refinanced loan as a modification of the old loan. The GSEs already accept automated appraisals for many refinances and could do more. Also, Fannie Mae is piloting a refinancing process that does not require title insurance, but this pilot does not appear to have any performance metrics and could fall short.

Waive loan-level price adjustments

The second major barrier is the cost of loan-level price adjustments (LLPAs) the GSEs charge on refinances. This fee can be less consequential for borrowers with great credit and high home equity (0.5 percent of the mortgage amount or less) but can be dramatic for borrowers with low credit scores (3.5 percent of the mortgage amount or more). Despite this variance, this fee is not cost driven, as research has shown refinancing reduces default risk because of the resulting lower monthly payments.

The GSEs could fix this second barrier independently and easily, by waiving the LLPAs on rate-term refinances. Borrowers with incomes below 80 percent of the area median income who use GSE affordable housing programs already have the fee waived. Moreover, the borrower already paid an up-front fee to cover the cost of the credit risk when the loan originated; paying a second time for a now-reduced risk does not make sense.

Reach out to borrowers who could benefit from refinancing

Finally, many borrowers aren’t sufficiently informed about the benefits of refinances. Lenders and servicers are not required to inform borrowers when a refinance becomes beneficial, so the most profitable borrowers with high-balance loans are most likely to be contacted first despite needing it the least. Meanwhile, many borrowers who would benefit the most from refinancing aren’t contacted, and even if they are, the call may not include an explanation of why refinancing can be beneficial.

In a survey of borrowers who did not refinance during the COVID-19 pandemic, an overwhelming majority had not even applied. The two most cited reasons were not realizing the magnitude of monthly savings and the mistaken belief that a refinance has to reset the mortgage term back to 30 years.

To increase information about the benefits of refinancing, the CFPB or the GSEs and the FHA could require servicers or lenders to contact borrowers when they would benefit from a refinance, clearly explain the benefits of refinancing and the options available (e.g., borrowers do not need to extend the loan term), and explicitly provide a dollar amount for monthly savings. The government entities can also study other ways to reach these borrowers, including whether information should come from the entities themselves, similar to the booklet borrowers receive when getting an adjustable-rate mortgage.

More dramatic overhauls would be disruptive and may not materialize

Some have proposed that the system should be reengineered to lower rates automatically as rates decline (e.g., one-way adjustable rate mortgages or ratchet mortgages). But this option would disrupt the well-functioning mortgage-backed securities (MBS) market, which relies on trading fixed coupons. The MBS market allows borrowers to lock their interest rate at the time of application because the lender can hedge their risk by selling the loan forward. Any overhaul would generate years of debate and require changes to the entire mortgage ecosystem. Lowering the three barriers outlined above would accomplish most of what can be done through a more radical overhaul, in a minimally disruptive form at the right time.

Why is now the right time? Streamlining the refinancing process will increase prepayment speeds for mortgages, marginally lower the price investors are willing to pay for MBS, and thus marginally increase the rates borrowers pay. But few mortgages would be affected in this high-rate environment, while the changes should make the overall system safer and close the gap in mortgage rates between more affluent and less affluent borrowers, as well as between white borrowers and borrowers of color.