CHLA Urges FHA to Pay Lenders for Small Mortgages Under $100K

The Community Home Lenders of America (CHLA) is urging the Federal Housing Administration (FHA) to prioritize direct payments to lenders within its upcoming small-dollar mortgage pilot program. CHLA argues this approach is the most effective method to significantly increase the origination of mortgages valued below $100,000. In a comment letter submitted on July 16 to acting FHA Commissioner Joseph Gormley, the trade group stated that lenders typically incur losses on small-balance mortgages due to fixed origination costs exceeding the revenue generated from these lower loan amounts.

The CHLA's recommendations are intended to inform the implementation of Section 105 of the 21st Century ROAD to Housing Act. This legislation empowers the FHA to establish a pilot program designed to enhance access to mortgages under $100,000. The act grants the FHA the authority to provide direct financial compensation to loan originators, modify FHA loan terms and associated costs, and offer grants to borrowers to cover expenses such as down payments, closing costs, appraisals, and title insurance.

This proposal emerges as policymakers are actively examining the declining availability of small mortgages, despite the continued existence of more affordable housing options in numerous markets. An analysis conducted by the Urban Institute in 2022 revealed that approximately 600,000 U.S. homes, representing 13.1% of all home sales in 2020, were sold for less than $100,000. However, only about one-third of these homes were financed with a mortgage, a stark contrast to the over 80% of homes selling for $100,000 or more that utilized mortgage financing.

The Urban Institute's report further indicated that applications for mortgages under $100,000 faced significantly higher denial rates compared to larger loans. Researchers attributed these denials to factors such as lender economics, fixed origination expenses, and servicing complexities. The institute also noted that borrowers seeking small-dollar loans are often individuals with lower incomes, first-time homebuyers, or minority buyers. Consequently, expanding access to these mortgages would necessitate policies that improve the financial viability of originating smaller loans, according to the Urban Institute.