May 19, 2021
In today’s grueling housing market, purchasing a house isn’t easy. Homebuyers are confronting skyrocketing home prices and a host of other factors spurred on by COVID-19, such as tightening credit, an undersupplied market, and an intense demand for more living space. Though the lack of affordable housing remains a major impediment to homeownership, homes that may be affordable for low- and middle-income homebuyers are not a myth.
Low-cost properties comprise a significant proportion of the housing stock in much of the country. Homes costing $100,000 or less are prevalent in rural, suburban, and urban areas like South Bend, Detroit and El Paso, Texas. Despite this availability, many low- and middle-income homebuyers are unable to buy homes they can afford, even as these properties languish on the market.
Recent legislation sheds light on this paradox. Last month, the U.S. House of Representatives passed the Improving FHA Support for Small-Dollar Mortgages Act of 2021 (H.R. 1532), which directs the Department of Housing and Urban Development to review the Federal Housing Administration’s (FHA’s) practices related to small-dollar mortgage lending—defined as loans of $70,000 or less—and plan for the removal of barriers to making small-dollar loans. Overall, the bill is intended to address the crux of why many families are unable to access affordable homes on the market: small-dollar mortgages needed to finance their purchase are simply not available.
According to analysis by the Urban Institute, in 2019, only one in four homes sold nationwide were priced below $100,000, and of those sales, only 23.2% were financed with a mortgage, while the rest were paid for primarily with cash. By contrast, 73.5% of homes costing $100,000 or more were purchased with a mortgage. The limited availability of small-dollar mortgages is even more evident when looking at lending trends since the Great Recession: mortgages with a balance below $70,000 are down 38% since 2009, while loans with balances above $150,000 have increased 65% during this same time period.
Additional research and reporting suggest that families hoping to buy a house less than $100,000 face difficulty finding lenders who offer small-dollar loans. Even when they are able to find a lender and manage to apply for a loan, they face higher denial rates. Indeed, analysis of 2019 data reveals that denial rates for mortgage loans below $100,000 are higher than for loans of $100,000 or more across private and government (including FHA) mortgage lending channels. While it is easy to attribute higher denial rates to weaker credit profiles, a deeper look at this issue indicates that borrowers of small-dollar loans have similar credit profiles to consumers of midsize loans.
What, then, is driving the inaccessibility of small-dollar mortgages?
One of the underlying reasons lenders are shying away from small loans is a surprising one—the anti-predatory laws and regulations implemented in the wake of the Great Recession make it difficult for lenders to provide credit while still turning a profit. Designed to protect borrowers from predatory lending and exorbitant fees, these regulations place caps on the fees banks can collect from each loan they process.
At the same time, lenders report higher fixed origination costs and penalties from delinquent loans. To compensate for these higher costs, mortgage lenders rely on higher profits. Small loans generate lower income and profit margins for the same amount of work it takes to extend a larger loan, disincentivizing many lenders, particularly big banks, from entering the small-dollar mortgage market. When the fixed lending costs exceed the maximum revenue made on a loan, many lenders find their hands tied.
Even though a supply of housing is available, the difficulty of obtaining small-dollar mortgages effectively denies low- and middle-income families access to homeownership. These inequities disproportionately affect Black and Latinx residents in historically redlined communities where low-cost homes are prevalent. By starving residents of the financing they need to purchase affordable homes, our current system keeps many families locked out of home equity and opportunities to build wealth.
Eventually, many of these modestly-priced homes are snapped up by investors through all-cash purchases, further shutting out potential homeowners who rely on credit. Previously affordable houses are often turned into rental properties, leaving potential homeowners with few choices other than perpetually paying rent or engaging in predatory housing practices, such as rent-to-own arrangements or contract-for-deed sales. Absent landlords often have few incentives to renovate or maintain their rentals, which leads to deteriorating property values, and whole neighborhoods and communities can become trapped in mortgage deserts with no easy way of escaping.
To better understand this issue at the local level, New America’s Future of Land and Housing program is partnering with the Center for the Study of Economic Mobility at Winston-Salem State University to explore the market for small-dollar mortgages in Forsyth County, North Carolina. Through interviews with mortgage lenders and brokers, and quantitative analysis of the local housing market, we are examining whether national trends hold in a county where low-cost “fixer uppers” are available but out of reach for low- and middle-income residents. We are exploring the local conditions preventing buyers from accessing credit and the downstream effects on communities. Ultimately, we hope to recommend policy solutions at the local and federal level to help make small-dollar loans more accessible while still protecting consumers from predatory lending practices. For homeownership to be a potential solution to addressing the racial injustices perpetuated through discriminatory housing policies, it must be accessible to everyone.
The passage of H.R. 1532 shows that the federal government is aware of this problem. But this is just the first step. Further research in this area can inform current policy proposals and find ways to unlock credit to a wider swath of homebuyers. Broad-based solutions are necessary but so are recommendations tailored to the local conditions of the most impacted communities.
For more information on New America’s research on small-dollar mortgages, please see our project summary.