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Rohit Chopra is director of the Consumer Financial Protection Bureau (CFPB). This article is adapted and edited from a speech delivered yesterday at the National Housing Conference in Washington, DC.

While we often focus on homeownership as a vehicle for accumulating wealth, a well-timed mortgage refinance can make a major difference in a family’s 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% 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%, peaking at 7.79% in October 2023. Since then, rates have eased to 6.35% 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%. Of these 12.2 million mortgages, 7 million are above 6% and approximately 60% 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 today’s rates and see their interest rates decrease by at least three quarters of a percent. If interest rates fell another point to 5.5%, 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 homeowners’ 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 down payment. 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 won’t 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 owner’s 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. 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 “fancy technology” 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 “open banking” 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 family’s 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 week’s September meeting of the Fed’s 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.