How a Lending Gap Hurts East Winston

FLH's Sabiha Zainulbhai and Zach Blizard, Research Manager with the Center for the Study of Economic Mobility at Winston-Salem State University, wrote for the Winston-Salem Journal on how the inability to secure mortgage loans for low-value homes locks out Black and Hispanic communities in Winston-Salem, North Carolina from the benefits of homeownership.

In the wake of the Great Recession, the Dodd-Frank Act was enacted to protect lower-income homeowners from being exploited by unscrupulous lenders when issuing mortgages.

Yet there is an ironic twist: Some regulations in Dodd-Frank have instead made it more costly for banks to issue small-dollar loans—hurting many of the same families the legislation intended to protect. Bank profits have been squeezed since many closing costs are fixed, and processing small mortgages takes essentially the same amount of work as large loans for less profit.

As a result, both here and nationwide, many banks are limiting their participation in the small mortgage market. Since 2007, these sub-$100,000 mortgages have fallen by more than 50% in Forsyth County. Even when families do apply for small loans, they face denial rates that are two to three times higher than those of large loans. This is despite the fact that smaller loans are no riskier than larger ones, according to some of the best evidence available.

A major complication in Forsyth County is the relatively poor physical condition of these less expensive homes—which are heavily concentrated in East Winston. State and local homeownership programs intended to help first-time, lower-income buyers purchase homes have rigorous inspections and these homes have a hard time passing, which can jeopardize the ability to secure a mortgage.

Read more about how the lack of small-dollar loans is affecting families in Winston-Salem here.