When Emilee Warner bought her Nashville, Tennessee, home in 2017, she had a job at a record label and was making almost six figures. Her partner was working too. So, buying a house with a $2,100-a-month mortgage at a 4.8% interest rate felt well within reach. 

Said Warner: “$2,100, sure, that’s a big deal for anyone. But I felt like it was worth it.”

Then came 2020. Warner got laid off. The pandemic hit. Then she got divorced. Suddenly, that $2,100-a-month mortgage payment felt like a lot more of a stretch. 

When she started getting letters in the mail telling her that she could refinance and get her interest rate down to 2.8%, she did some quick math and realized that could end up reducing her monthly payment by $700 to $900. 

“Which would make a huge difference every month for me,” Warner said. When she tried to refinance, though, she learned she couldn’t — because she was unemployed. 

For more than a year now, mortgage interest rates have been historically low, around or below 3%. Millions of homeowners have taken advantage of those low rates and refinanced, cutting their payments, in some cases, by hundreds of dollars a month. 

But many who might have benefited the most from lower monthly expenses — people who lost jobs or income in the pandemic — haven’t been able to because lenders generally require homeowners to be employed if they want to refinance. 

“For the typical borrower, if you’ve become unemployed since you got your original mortgage, you’re going to be pretty much locked out of the market,” said Anthony DeFusco, associate professor of finance at the Kellogg School of Management at Northwestern University.

That wasn’t always the case, at least for homeowners who had mortgages backed by the Federal Housing Administration.

“It used to be that if you had an FHA mortgage and you became unemployed, you were allowed to refinance,” DeFusco said. 

Then the pain of the Great Recession hit — late 2008, 2009. “Things were really falling apart all over the mortgage market,” said John Mondragon, a research adviser at the Federal Reserve Bank of San Francisco. 

That’s when the FHA changed its rules and started requiring people to show proof of employment to refinance.

When that happened, Mondragon said, “it really seemed to be pushing out those borrowers who were most likely to have demand for refinancing.”

Like the people who lost their jobs in the recession. Technically, the FHA requirement that people be employed to refinance only lasted a couple of years, but most lenders have kept it in place ever since.  

In a study Mondragon and DeFusco did after the Great Recession looking at the impact of that change, they found that back when homeowners did not need a job to refinance, “unemployed people were refinancing at rates that were roughly, in 2009, three to five times as large as the rate that employed people were refinancing,” DeFusco said. 

Which means that, right now, there is likely a lot of pent-up demand.

With refinancing off the table, a lot of low-income homeowners have been relying on the mortgage forbearance options the federal government put in place during the pandemic.

“Being able to refinance for them obviously would also be a huge help for being able to afford their monthly mortgage payments,” said Ivy Perez, policy and research manager at the Center for New York City Neighborhoods.

It’s something Mondragon at the San Francisco Fed thinks should be on the table because barring the unemployed from refinancing isn’t just hurting them — it’s also hurting the economy.

“Part of the idea of monetary policy is that in a recession, you lower interest rates. These interest rates get passed on to businesses so that they can invest and borrowers so that they can spend,” he said. 

One of the biggest channels for that is the mortgage market because many people’s mortgage payments are their biggest expense. 

“So borrowers not being able to access low rates when they really should be and want to … makes recessions probably more painful than they need to be,” Mondragon said. 

It further exacerbates inequality, too, because people who have money and are financially stable are able to reduce their payments, while people who are struggling cannot.