Where have all the small loans gone?
Getting a mortgage loan for less than $50,000 has never been easy, but it’s becoming next to impossible. From 2004 to 2011, the national share of these loans hovered between 3 and 4 percent, but by 2014, it had declined to just 2.3 percent. The absence of small loans may seem insignificant in high-cost markets, but in cities like Kalamazoo, Michigan, and Tampa, Florida, a significant portion of the housing stock sells for $50,000 or less. And if potential buyers can’t get a mortgage for these houses, they’ll miss that important first rung on the homeownership ladder that helps both families and neighborhoods.
While some have speculated that the qualified mortgage rule with its points and fees cap may have affected the share of smaller loans, our recent study of the qualified mortgage rule showed it had no impact on loans under $100,000. But when Ellen, who serves on the Consumer Financial Protection Bureau’s Consumer Advisory Board, reported these findings at a recent board meeting, members from low-cost areas challenged her to help them better understand why they were seeing a lack of mortgages under $50,000 in their communities.
To answer this question, we examined 10 metropolitan statistical areas (MSAs) where a substantial share of the housing stock is worth less than $50,000. In 2014, lower-valued homes accounted for over 8 percent of the stock in each of these MSAs (except in Stockton-Lodi, California). These shares have been on the rise since the housing crisis. In Tampa, the share of lower-priced homes increased from 5 percent in 2007 to 11 percent in 2014.
But the number of small mortgages doesn’t match the number of lower-value homes: the share of owner-occupied, purchase mortgages under $50,000 has steadily declined over the same postcrisis period. That share in Tampa has always been less than 3.5 percent but dropped to 2.1 percent in 2014.
The lack of small mortgages in these markets becomes more apparent when we compare the number of new mortgages under $50,000 with the number of homes worth less than $50,000. In Tampa, only 614 borrowers took out a sub-$50,000 mortgage to purchase a home in 2014, accounting for a mere 0.35 percent of the more than 177,000 area properties worth less than $50,000. If you consider borrowers who have a 20 percent down payment and could thus afford a $62,500 home, the mortgage shortfall is even more significant.
Small mortgages account for only a fraction of the low-cost home stock in each of the MSAs, and the share is falling at an alarming rate. By 2014, small mortgage originations accounted for less than 1 percent of the low-cost home stock in all selected MSAs.
The decline in small loans has been accompanied by an increase in the denial rates for applicants for these loans. According to our calculations based on Housing Mortgage Disclosure Act data, the denial rate for loans under $50,000 has been consistently higher than the denial rate on larger loans in the postcrisis years. In 2014, for the conventional channel, the denial rate for sub- $50,000 loans was 22 percent, much higher than the 17 percent rate for loans between $50,000 and $100,000. The gap is even larger in the government loan market: 33 percent compared with 20 percent. The impact is not benign. As the country has seen a significant improvement in the portion of existing mortgage loans that are underwater, the rate of improvement lags for low-cost houses—an unsurprising result if there are few mortgages available to potential buyers.
So what’s happening in these markets? We cannot assess how many potential homeowners there are. But tight credit and the low profitability of small loans are making it extra hard for those who want to purchase. We have written about how difficult it is for borrowers with less-than-pristine credit to obtain a mortgage right now. According to our most recent Housing Credit Availability Index, credit has remained at historically tight levels since 2009.
Moreover, lenders don’t find these loans attractive. Loan origination costs are largely fixed and recovered either through the sale of the loan or, over time, through the financing spread and payment for servicing. Smaller loans generate lower sales prices, spreads, and servicing income, making them less economically attractive to lenders.
What’s happening instead? Three possibilities are no sales, more all-cash purchases (which tend to be to investors, rather than owner-occupants), and greater use of seller financing vehicles, including land contracts, which often have fewer protections for borrowers than traditional mortgages. None of these is optimal for potential homeowners or communities.
Small mortgage loans are important to the vitality of hundreds of urban communities throughout the United States. Bringing them back will be hard, and we don’t have any immediate or easy solutions. We’re eager to work with policymakers and industry leaders to understand the impact of the loss of these loans and develop strategies to encourage their availability.
Photo by Shutterstock.