The Department of Housing and Urban Development stated that it is seriously considering ways to make small-dollar mortgage financing easier but has not yet specified how it will do so. HUD gave the issue its attention in April. However, a senior HUD official claimed in the middle of July that it was challenging to convince lenders to provide modest mortgages since, quite frankly, the economics of the entire industry depend on percentages.
While this is happening, several professionals in the industry have ideas for how HUD could make financing these loans more practical. For example, it isn’t easy to find small-dollar mortgages, which often have balances under $200,000. As a result, lenders steer clear because they are just as expensive to originate as larger loans, but they pay out less—roughly 1% of the loan sum.
Homewise CEO Michael Loftin suggested HUD take a page from the government-backed businesses. Although they rarely support small-dollar loans, Fannie Mae and Freddie Mac compensate lenders for making them. He continued by saying that non-traditional lenders like credit unions and Community Development Financial Institutions (CDFIs) should play a significant role in any federal government strategy to increase access to small-dollar mortgage loans.
Recent research by The Pew Charitable Trusts highlighted the difficulties in lending for small-balance mortgages. The study discovered that lenders prioritize higher-balance loans because of fixed mortgage origination costs. According to the study, small mortgages have the same regulatory and compliance issues but are less profitable because lender income is commission-based. Making small-dollar loans more accessible would reduce consumers’ reliance on riskier and more expensive alternative financing, according to Tara Roche, a co-author of the paper. To have a better understanding of the HUD’s plan for small-dollar mortgages and prospective solutions lenders can take to engage in small-dollar mortgages, click here.
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