This Axios report on a JPMorgan Chase program giving black and Latino borrowers $5,000 toward down payments or home loan closing costs reminded me of a column I wrote in November . It’s about one of the most infuriating public policy fiascos I’ve run into in a very long time. Hardly anyone knows about this regulatory devastation of household wealth amog people whose inexpensive homes represented years of thrift and hard work. (The only reason I learned of it is that I happened to meet Craig Richardson at an unrelated conference.) It is absolutely heartbreaking. It reminds me of the famous quote from The Great Gatsby: “They were careless people, Tom and Daisy—they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made.”
About one in five U.S. homes are valued at $100,000 or less. And despite their low prices, they’ve gotten extremely hard to sell. When they move at all, these small-dollar properties tend to go for cash. Lenders increasingly won’t write mortgages for them.
“Over the last decade, origination for mortgage loans between $10,000 and $70,000 and between $70,000 and $150,000 has dropped by 38 percent and 26 percent, respectively, while origination for loans exceeding $150,000 rose by a staggering 65 percent,” reports a new study on small-dollar mortgages from the Center for the Study of Economic Mobility at Winston-Salem State University and the Future of Land and Housing program at the New America think tank. The study is scheduled for release on Tuesday [Nov 9, 2021].
The culprits behind the disappearance of small-dollar mortgages are lending restrictions enacted with good intentions and warped by economic blind spots. Designed to protect borrowers and the financial system, the Dodd-Frank Act regulations passed in the wake of the 2008 financial crisis “increased the fixed costs and the per-loan costs of extending a mortgage,” says the study. The regulation-imposed costs made small-dollar mortgages a lousy proposition for lenders.
Compounding the problem, the Consumer Financial Protection Bureau then limited the fees that lenders could charge as closing costs. For profit-oriented lenders, small-dollar mortgages are no longer worth the trouble. At best, they squeeze out the tiniest of margins. At worst, they don’t even cover the fixed cost of processing the loan.
Author(s): Virginia Postrel
Publication Date: 25 June 2022
Publication Site: Virginia’s Newsletter at substack