The dream of homeownership is becoming more elusive for Americans looking to secure affordable mortgages. Studies show it’s not only because of skyrocketing home prices and interest rates but also because lenders are less likely to fund small-dollar mortgages under $100,000.
“It is particularly hard for people who are buying smaller houses with smaller mortgages to find a lender and to get that mortgage, and they also surprisingly are more expensive,” Mike Calhoun, president of the Center for Responsible Lending, told CNBC, which did a thorough investigative report on the crisis.
The report showed the denials are not based on creditworthiness or other factors, as families tend to have similar profiles to those applying for larger mortgages.
According to financial experts, the real reason mortgages under $100,000 are denied more than larger mortgages is profit.
“One barrier for small-dollar mortgages is that it’s just not as profitable for lenders to do them,” said Janneke Ratcliffe, vice president of the Housing Finance Policy Center at the Urban Institute. “Lenders get all their fees and interest based on the loan amount so they’re going to get a lot less revenue on a $70,000 mortgage than they are on a $700,000 mortgage.”
More than a quarter of homes on the market are priced under $100,000, but only $23.2 percent of those mortgages were funded with a mortgage. The number is staggeringly low when compared with the 73.5 percent of homes purchased with mortgages for loans over $100,000.
And things are not getting better.
The value of homes priced between $10,000 and $70,000 dropped by over 53 percent; and those between $70,000 and $150,000 dropped by 23 percent from 2011 to 2021, CNBC reported.
In contrast, the value of homes priced over $150,000 rose 240 percent in the same decade. The problem is being exacerbated by real estate investors with deep pockets, according to Ratcliffe.
“Small-dollar homes that could represent the first stop on the path to homeownership for a family with modest income are not being sold with mortgages, which means they are probably being bought for cash,” Ratcliffe said. “That means somebody with deep pockets is able to come in and offer to pay cash.”
As a result, families with median income are being priced out of an already saturated mortgage and resorting to dubious methods including something called a contract for deeds, said Mike Calhoun, president of the Center for Responsible Lending.
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“One example that is surprisingly prevalent is people end up into something they call Contract for Deeds, where it’s essentially you’re renting and if you make every payment on the loan on time, you eventually will own the house but if you miss any payment, you not only lose the house, you have no equity in it either,” Calhoun explained. “And there are millions of these transactions out there in the country today because people don’t have the alternative. They’re being pushed into those mortgages.”
In short, the odds are stacked against Americans who are not wealthy with significant cash on-hand. Racial bias is also still a major issue based on data from the Home Mortgage Disclosure Act.
Black applicants were denied at a rate of 18.1 percent, white Hispanics were denied at 12.5 percent, Asians were denied at 9.7 percent and white Caucasians were denied at just 6.9 percent.
“Lenders can look up additional debts of potential homebuyers including that of medical debt and student loan debt relative to the homebuyers’ loans that are in default which can limit opportunities for less established potential homebuyers,” said Lauren Bealore, associate director of state and local policy at Prosperity Now.
“Expecting communities that have not historically had the privilege of financial liberties to be financially secure when making one of those important purchases of their lifetime is like expecting an athlete with no training or coaching to win a national championship title,” Bealore continued. “It’s just unrealistic and indeed a stretch that has certainly added to the difficulty of homebuying in the U.S.”
PHOTO: Crystal Marie McDaniels poses in front of her home in Charlotte, N.C., on Friday, July 9, 2021. (AP Photo/Nell Redmond)