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Small-dollar Loans Can Make a Big Difference

Low housing inventory and climbing home prices have been the source of numerous studies and headlines, and they are prominent issues impacting housing markets across the nation. However, while many homes in competitive markets are priced out of reach for most Americans, in other areas there quietly sit affordable homes that, despite their low prices, remain out of reach for low- and middle-income Americans.

Despite finding “a substantial number of low-cost property sales taking place across many diverse housing markets,” researchers at the Urban Institute’s Housing Finance Policy Center say, “low-cost properties remain largely inaccessible to LMI [low- and middle-income] households because traditional mortgage financing is too difficult to obtain on these properties.”

“Low-cost properties could be a larger source of affordable housing if credit access for purchasing and rehabilitating these properties were expanded and improved,” state researchers from the Urban Institute in their report, “Small-Dollar Mortgages for Single-Family Residential Properties.”

Low-cost homes, priced at or under $70,000, are present in urban, suburban, and rural markets and “in many counties, small-dollar sales make up most home sales,” according to the Urban Institute.

However, only about one in four homes sold for $70,000 or less were financed with a traditional mortgage as of 2015, and that number fluctuated between 25 and 29 percent between 2010 and 2015. On the other hand, close to 80 percent of homes sold for between $70,000 and $150,000 were financed with a traditional mortgage in 2015.

The research also found the share of first-lien, single-family, owner-occupied home loan originations for low-priced homes between $10,000 and $70,000 was on the decline, falling from 8 percent of all home loan originations in 2009 to 5 percent of all originations in 2016.

Over the same time period, the share of originations for homes sold for between $70,000 and $150,000 declined less than 1 percent, and loans for homes sold at higher prices increased in market share.

Observing the channels that contribute to the small-dollar loan sector, the research found gaps between small-dollar market share and overall loan origination market share at the GSEs, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA).

The GSEs contribute to 53 percent of all home loan originations but just 45 percent of small-dollar mortgage loans. The FHA takes 24 percent market share overall but contributes just to 19 percent of small-dollar mortgages, and the VA holds a 10 percent market share overall but just a 3 percent share of the small-dollar market.

Twenty-eight percent of small-dollar loans are held in portfolios at small community banks, credit unions, and large lenders, despite the fact that just 9 percent of small-dollar loans are originated there.

The researchers pointed out a few reasons for the lack of financing available for low-priced homes. First, potential homeowners hoping to purchase a low-cost home with financing were less attractive than investor buyers ready to purchase with cash.

Second, the researchers point out that loan origination costs are largely fixed, making small-dollar loans less attractive to lenders, who can profit more from the larger spreads available in high-dollar loans.

“The limited access to mortgage credit for low-cost properties has led to a growing imbalance in America’s housing that affects both demand and supply,” state the researchers at the Urban Institute. The impact is particularly acute among potential first-time buyers.

The Urban Institute offers several recommendations to enhance the small-dollar loan market, including growing the role of the federal government, the secondary market, and community organizations in the small-dollar loan sector; creating “consumer-friendly, fairly priced small-dollar mortgage alternatives to traditional mortgages for home purchase, renovation, and refinance;” expanding “first look” programs that offer preference to first-time homeowners, low-income buyers, and minorities; and expanding finance options for manufactured housing.

About Author: Krista Franks Brock

Krista Franks Brock is a writer and editor who has covered the mortgage banking and default servicing industries since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

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