HUD seeks ways to reduce disproportionate costs for small mortgages

The Department of Housing and Urban Development is weighing the possibility of giving mortgage lenders and servicers financial incentives to address cost differences that hurt the availability of small loans.

In a study issued in conjunction with a related request for input on Tuesday, HUD identified those cost differentials as key barriers in efforts to get more low-cost mortgage financing to people buying homes valued at under $100,000.

The report found that while the Federal Housing Administration has initiatives that support small loans and could improve them, "it is unlikely that these programs can overcome the basic math problem faced by lenders in profitably originating and servicing small mortgage loans."

While costs for small mortgages are lower on a dollar basis, they're higher on a per-unit basis. For example, for homes with valuations below $100,00, the cost represented 4.5% of the ($3,145) loan's total amount between 2018 and 2020, as compared to 1.7% ($4,236) for higher-priced houses.

"Increasing the number of [small] loans submitted for FHA insurance endorsement may require either a reduction in origination and servicing costs or the provision of additional lender or loan originator compensation," HUD said in its report. Doing this could require revision to qualified mortgage rules as it sets some limits on points and fees, the report noted.

The secondary market sometimes will pay a premium for small loans as the cost hurdles involved serve as barriers to refinancing and prepayment. But given current policy interest in encouraging refis for affordability purposes, that's unlikely to further government agency interests.

HUD's key goal is to do something about the fact that relatively little of the low-cost mortgage financing the government has backed is getting to people buying the most affordable homes on the market.

Historically, less than one-fourth of borrowers buying homes valued below $100,000 have used mortgages to do so, with the remainder using either cash or alternative forms of financing with higher costs. For homes with higher price tags, more than 75% have used mortgage financing, HUD noted, citing other research from the Urban Institute's Housing Finance Policy Center and other sources in its report.

HUD Secretary Marcia Fudge on Tuesday called upon mortgage companies to help provide the kind of feedback that could help the department with its goal.

"We want to know what barriers prevent you from originating these loans," she said in a speech at the Freedman's Bank Forum. HUD is accepting comments in response to its RFI through Dec. 5.

The small loan topic is not new, but has gained more momentum under the Biden administration's broader push to implement more aggressive affordable and equitable housing policies and work with appointees that support the same. Ginnie Mae President Alanna McCargo, who heads an arm of HUD that protects securitizations of government-backed loans, has been an advocate for broader use of small loans and researched the topic in her previous position at the Urban Institute.

One of the perennial challenges in this area that HUD's study revisits is the possibility of making more of a push to bring government-related financing into the market for manufactured housing loans unsecured by land.

These homes are a significant component of the low-cost housing market, but personal loans have been an odd fit for agencies with programs that more typically involve real estate-secured financing.

"Manufactured homes comprise 28 percent of homes valued under $100,000. Many of these homes are placed on land not owned by the homeowner, which makes these homes personal property and not eligible for a traditional mortgage loan," HUD noted.

HUD continues to make some of these loans, and government-sponsored enterprises Fannie Mae and Freddie Mac have dabbled in them, but volumes to date have remained low, according to the report.