HUD Report Examines Barriers to Small-Balance Mortgages

The U.S. Department of Housing and Urban Development (HUD) has released “Financing Lower-Priced Homes: Small Mortgage Loans,” a report that assesses the factors that limit the supply of small mortgage loans, and the impact to affordable homeownership for those interested in lower-priced homes.

“This research supports the Biden-Harris Administration’s efforts to advance equity and affordable homeownership by assessing barriers to small mortgages,” said Solomon Greene, Principal Deputy Assistant Secretary for Policy Development and Research at HUD. “By continuing to examine ways in which we can better support small-mortgage lending, we can take important steps to ensure equal access to credit for borrowers seeking to purchase lower-priced homes, putting the dream of homeownership within reach for many more families.”

The report was submitted in response to a request from Congress to:

• Identify barriers or impediments to supporting, facilitating, and making available mortgage insurance for mortgage loans having an original principal obligation of $70,000 or less;
• Identify administrative actions that HUD could take to remove barriers and impediments; and
• Describe the effect of such actions on the solvency of the Mutual Mortgage Insurance Fund (MMI Fund).

“Financing Lower-Priced Homes: Small Mortgage Loans” highlights the challenges faced by borrowers who need loans to purchase lower-priced homes. Among its principal findings, the report notes:

• Mortgage loans with an original principal obligation of $70,000 or less represent a very small portion of the mortgage lending market, constituting less than 3.5% of home purchase originations in 2020. Many of these low balance mortgage loans secure properties valued at more than $70,000, indicating that the purchases included substantial down payments.
• Federal Housing Administration (FHA) programs do not impose minimum loan amounts, nor do FHA’s policies intentionally discriminate against small mortgage loans. FHA disproportionately insures loans for lower-priced homes compared to the rest of the mortgage market. FHA also has loan insurance programs for financing property improvements and manufactured homes that are targeted to lower loan amounts.
• A barrier to small mortgage lending are the fixed costs of loan origination and servicing, which makes smaller loans less profitable and may require additional incentivization for lenders.

“At HUD, we are doing everything in our power to connect those who have been historically disadvantaged with more resources and services,” said HUD Secretary Marcia L. Fudge upon the release of “Financing Lower-Priced Homes: Small Mortgage Loans” at the Treasury Department’s Second Annual Freedman’s Bank Forum.

“Both loan origination and servicing costs per loan have risen over time,” said the report. “Technology may help lower loan production and servicing costs. Freddie Mac finds lenders that more heavily used its automated technology had origination costs per loan of roughly 22% ($2,200) lower than lenders still relying on manual processes. However, small mortgage loans will generally be less profitable than larger loans given the regressive nature of fixed costs.”

Earlier this year, the Biden-Harris Administration launched its Housing Supply Action Plan to use legislative and administrative actions to help close America’s housing supply shortfall over a five-year span, beginning with the creation and preservation of hundreds of thousands of affordable housing units over the next three years.

“Our agency and the entire Biden-Harris Administration strives to close the racial wealth gap through investments in communities and in people,” added HUD Secretary Fudge. “We cannot do this work without partnership and strategic engagement. But, most importantly, we cannot let the failures of our past foretell our future.”