HUD’s small-dollar mortgage plan is still unclear
The Department of Housing and Urban Development said it was “researching very carefully” on how to make it easier to fund low-end mortgages, but had not yet specified how it would achieve that goal.
In April, HUD announced that it would look into the matter. But a senior HUD official in mid-July spoke about obstacles to getting low-end mortgages, instead of offering solutions.
“It’s hard to get lenders to do small mortgages, because quite honestly the economics of the whole business are on percentages,” the HUD official said.
HUD did not respond to a request for clarification on its plan to boost low-value mortgages.
Industry practitioners have some ideas about how HUD might make funding for such loans more feasible.
Smaller mortgages, typically with balances under $200,000, are hard to come by. Lenders avoid them because issuing a loan with a low balance is as expensive as a larger loan, but the compensation, which is about 1% of the loan balance, is lower.
Michel Loftin, CEO of At homewhose work revolves around sustainable homeownership, suggested HUD take inspiration from government-sponsored businesses. Fannie Mae and Freddie Macalthough they rarely back small loans, they subsidize the lenders for issuing them.
“Freddie Mac and Fannie Mae give [lenders] a small increase in their origination fees to encourage small dollar lending,” Loftin said. “It’s an acknowledgment that you earn less on a small loan.”
He added that alternative lenders, such as community development financial institutions (CDFIs) and credit unions, should be key players in any federal government plan to make low-cost mortgages more accessible.
“There are CDFIs and credit unions that want to do this work, but maybe they need an operating grant or cheaper capital to make it work,” Loftin said. “Having a product alone won’t solve the problem – you still don’t have people doing the work in the field.”
Loftin also suggested a subsidy for real estate agents because “they can’t make a living selling $40,000 homes.”
A recent report by researchers from The Pew Charitable Trusts highlighted the challenges of low balance mortgages. The report found that the fixed costs of mortgage origination are causing lenders to “focus on higher balance loans”. Small mortgages are less profitable because lenders’ compensation is based on commissions, but they carry the same regulatory and compliance risks, the researchers wrote.
Tara Roche, co-author of the report, said making small loans more accessible would help reduce buyers’ reliance on riskier and more expensive alternative financing.
Instead of mortgages, borrowers looking to finance smaller properties are turning to land deeds, seller-financed mortgages, lease-to-own, and personal home loans. This financing is often more expensive and lacks the consumer protections that come with mortgages, Roche said.
“In some arrangements, the deed or title is not delivered until much later in the transaction, sometimes not before final payment,” Roche said. These borrowers “have the responsibilities of ownership, but not all the benefits”.
The use of alternative financing is not evenly distributed either. Hispanic borrowers are nearly twice as likely to use alternative financing as any other race or ethnicity, Pew researchers found.
Roche said small-dollar lending is an overlooked area for mortgages, but it has a lot of potential. While it’s not yet clear how HUD will address the issue, Roche said she’s encouraged that HUD is focusing on the issue.
“In order to truly address the challenges in the small mortgage space, whether it’s the difficulty for lenders to create them profitably or the ability for buyers to access them, it will take effort on many fronts,” he said. Roche said. “HUD, even identifying this as a challenge, is an important step.”