Why would homeowners decide against a $9K saving?

by Steve Randall22 Feb 2019

A program designed to help those whose homes were left in negative equity following the financial crisis was not taken up by most of the eligible borrowers, even though they would have saved thousands of dollars.

The US FHFA set up its Home Affordable Refinance Program in 2009 but a new study by three professors at Columbia Business School has found that more than half of all eligible borrowers under the program did not decide to refinance their mortgages.

Those borrowers were sent preapproval applications, the offers were attractive, and there was no monetary cost; so why did the borrowers choose not to refinance?

Suspicion of banks say the researchers.

Despite the average potential saving of $8,719, the study concluded that borrowers’ suspicion of banking institutions is the main or only reason that many customers do not accept refinancing offers.

And the correlation between suspicion and refinancing is robust and significant they found.

The study warns that if suspicion of the banking sector is not strong, customers are less likely to refinance and are likely to continue paying more and increasing the risk of defaults from those higher monthly mortgage costs.

The paper, "What's the Catch? Suspicion of Bank Motives and Sluggish Refinancing," by Professors Eric Johnson, Stephan Meier, and Olivier Toubia, is published by Oxford Academic.

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