• Wed. Dec 6th, 2023

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Small-Dollar Mortgages and Affordable Housing

First-time buyers and lower-income households often purchase low-cost properties as an entry point into homeownership. Improved access to mortgage credit to finance low-cost properties could help lower-income households increase their housing stability and build equity and inter-generational wealth.

With rent prices soaring and an undersupply of affordable rental units, there are opportunities for alternative pathways to affordable housing for lower-income households to be considered.

Affordable housing is not a new issue. In 2019, about 46% of renters spent one-third of their income (PDF) on rent and utilities. Even more concerning, 24% spent more than half of their income on housing and were considered severely cost-burdened.

A common misperception about homeownership is that it is not as affordable for lower-income households as renting. Actually, in 58% of U.S. counties, buying a home is more affordable than renting, according to a January 2022 report from real estate data company ATTOM Data Solutions..

Small-Dollar Mortgage Challenges, Benefits and Resources

While there is no shortage of potential solutions for addressing the affordable housing crisis, many of them overlook homeownership. And while there is a need for affordable rental units, renting does not always provide lower-income households with the long-term affordability and security that homeownership does.

On June 30, the Cleveland Fed hosted a FedTalk, “Increasing Affordable Housing Options for Lower-Income Households,” that featured a panel of experts to discuss the benefits of, challenges to and resources available for small-dollar mortgages. (See box.)

There is no universal definition for a “small-dollar mortgage.” However, for this blog post a mortgage in the amount of $100,000 or less was used as a reference point. This post summarizes the key takeaways of the event.

The Outlook for Prospective Buyers of Lower-Cost Homes

Supply—In the U.S., some regions have a large supply of lower-cost properties. As of 2018, there were “large concentrations of small-dollar mortgages throughout the middle of the country and the South and in regions such as Appalachia and the Mississippi Delta,” said Kimberly Kreiss, a Federal Reserve Board of Governors data scientist.

Affordability—A first-time borrower eligible for down payment assistance who is buying a home for $100,000 would pay less for a house payment than someone would pay for rent on a three-bedroom home or apartment in Kentucky, even in today’s rate environment, said Jaime Rice, managing director of Single-Family Programs at Kentucky Housing Corp. That would be the case regardless of whether the borrower had Federal Housing Administration (FHA) or conventional financing.

Origination Cost—Originating a mortgage is expensive for lenders. There are two types of costs involved—fixed costs and variable costs—said panelist Gabe del Rio, president and chief executive officer of the Homeownership Council of America. “Fixed costs are not negligible,” del Rio said. “Whether you are originating a mortgage of $70,000 or $700,000, those costs are there, and they’re the same.”

Market Challenges—Today’s housing market holds significant challenges for any homebuyer, but especially first-time buyers who may have limited buying power or financing options. The high cost of building new homes, lower supply of existing homes and increasing interest rates all contribute to homes selling above their listing prices. Sales contracts that list government financing—like that through the FHA and the departments of Veterans Affairs and Agriculture—are being rejected in favor of cash offers, and beyond cash offers, conventional financing, Rice said.

Resources for Prospective Small-Dollar Mortgage Borrowers

State Housing Finance Agencies—These agencies play an important role in increasing access to successful homeownership for first-time and lower-income buyers through down payment assistance and funding of education and counseling programs.

Simultaneous Second-Mortgage Program—Lower-priced properties tend to be older and require more repairs. For lower-income and first-time buyers who may lack savings, this may be a stumbling block. CHN Housing Capital, a Cleveland-based community development financial institution, used this issue as an opportunity to develop an innovative mortgage product, Believe Mortgage, that allows a simultaneous second mortgage of up to $8,000 for home repair. This type of product gives lower-income borrowers the opportunity to address, upfront, home repairs that otherwise could potentially derail their chances for sustainable homeownership.

Addressing the Racial Homeownership Gap

Black people have lower homeownership rates. Their home values are also lower. Black neighborhoods have less overall long-term investment. The Homeownership Council of America, Mortgage Bankers Association and National Fair Housing Alliance recently launched an online toolkit for mortgage lenders designed to help them develop special purpose credit programs (SPCPs) for underserved communities.

SPCPs were permitted under the Equal Credit Opportunity Act of 1974 to give lenders an opportunity to offer mortgage credit to economically and socially disadvantaged borrowers. Lenders in areas with large concentrations of entry-level homes could potentially use SPCPs to develop mortgage products to direct financial assistance to those who historically have been left out of homeownership, strengthen underserved neighborhoods and increase sustainable homeownership.

Efforts to increase small-dollar mortgages can benefit from addressing the issues of cost, housing stock quality, credit access and scale. Equitable access to credit could help lower-income households increase housing security and build intergenerational wealth, address long-standing racial inequities in housing and improve the economic well-being of communities of color.


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