Small-mortgage shortfall threatens minorities' American Dream

• Small-mortgage lending fell by nearly 70% from 2004-2021
• Gap pushing more toward risky alternative financing
• Hispanic communities hit particularly hard

WASHINGTON - Laura Arce is on a quest to help more Latino families buy houses - still a big part of the American dream for many - but she is worried: banks are increasingly unwilling to finance the purchase of inexpensive homes.

Home ownership is almost a quarter lower among Latinos than among white Americans nationwide, and this gap widened after the pandemic, in part because of differing employment patterns, she said, though not due to weak interest.

"Latinos really value home ownership," said Arce, who leads a campaign by UnidosUS, a civil rights and advocacy group, to create 4 million Latino homeowners by 2030.

"They can talk about being the first in the family to buy a home – that's a milestone in belonging in the U.S."

Latinos, as a relatively youthful population, will make up the majority of first-time buyers in coming decades, UnidosUS says.

The question is whether they will be able to finance their dreams as house prices rise and banks turn away from smaller mortgages -- sometimes defined as under $150,000 -- partly because of high costs and tighter regulation.

This scarcity can be traced back to the 2008/9 financial crisis, which led to widespread home foreclosures, growth in corporate home ownership, a slowdown in construction and new banking regulations.

"The availability and willingness of the market … just isn't there," Arce told Context.

"The incentives aren’t set up to focus on that product."

In turn, Latinos and others are being pushed toward alternative financing that Arce said can "make a lot of folks vulnerable to borderline predatory players".

That's because these alternatives tend to be riskier, costlier and often not subject to robust consumer protections, legal aid groups say.

Authorities, recognising that home ownership represents a central wealth-building opportunity for financially underserved communities, are taking notice.

Federal housing officials have been collecting public feedback on small mortgages and are charting next steps, a Department of Housing and Urban Development spokesperson said.

The idea is to develop policies that can expand affordable home ownership in underserved markets where housing prices are lower.

Senator Tina Smith, who chaired a hearing on "abusive" alternative financing in July, said addressing incentives for providing smaller mortgages would reduce demand for "potentially exploitative" arrangements.

"It's wrong that unscrupulous home sellers are able to take advantage of these challenges and prey on vulnerable home buyers," she said in emailed comments.

Small dollar, big issue

From 2004 to 2021, small-mortgage lending fell by nearly 70%, the Pew Charitable Trusts said, while lending for larger mortgages grew by 52%.

Alex Horowitz, project director for Pew's Housing Policy Initiative, said in recent years 71% of home sales over $150,000 involved a mortgage, compared with just 26% under that amount.

"That indicates that there's really a lack of access," he said.

"This is a primary reason why we're seeing lower home ownership rates, and it's affecting low-cost areas, Black households, Hispanics who rent at higher rates. If we can solve this one, it can do a lot of good."

The exact reasons are complicated but Horowitz pointed to skyrocketing home values and a dearth of affordable housing – along with a near tripling in the cost to originate a mortgage, in part due to regulatory changes after the financial crisis.

"Especially in really strong markets, it's hard to justify (originating small mortgages) in terms of the profitability of a lender," said Marina Walsh, vice president of industry analysis for the Mortgage Bankers Association.

But, she said, the main issue was that supply had not kept up with demand, pushing up house prices.

"You can call it small-dollar lending, but currently it's a bigger issue."

Some financial institutions are seeking to plug the small-mortgage gap, said Pablo DeFilippi, executive vice president of Inclusiv Network, an association that leads Juntos Avanzamos, a national designation of almost 140 credit unions addressing financial inclusion among Latinos and new immigrants.

"The mortgages space is where we have seen the biggest impact and the best performance," he said, noting significant demand and notably low delinquency.

"Many of our member credit unions see this as a market opportunity but also as aligned with their own mission."

'They can't protect themselves'

Pew’s Horowitz said the mortgage shortage was driving more people to rent, or to find other ways to buy. About 1 in 15 Americans borrowing for a home last year were using alternative financing, he said, and Hispanic home buyers appeared to be the most at risk.

"There's a perfect storm with these risky factors that put (buyers) in a position where they can't protect themselves," said Sarah Bolling Mancini, co-director of advocacy for the National Consumer Law Center.

Corporate landlords increasingly offered alternatives after the financial crisis, she said, citing as an example the land installment contract, in which a buyer agrees to pay off a home's value over a few years.

But the purchaser doesn't get the title until the end, meaning default can led to losing the home and the money spent.

Many don't even recognise the risks, Mancini said, referencing former clients in the Atlanta area who thought they had purchased low-cost homes under typical mortgage terms only to find out otherwise when economic problems caused them to default, according to a 2018 lawsuit.

Like Georgia and dozens of other states, Minnesota lacks robust regulation on such contracts, said Elizabeth C. Goodell, supervising attorney with Mid-Minnesota Legal Aid, a nonprofit that saw a "high number" of these cases following the financial crisis.

"Some people get really ripped off because the down payment might be something more like a (traditional) buyer would put down," she said.

"But the contract ends within three to five years, and after that ... you have to come up with the rest of the money."

Goodell said efforts are underway in Minnesota and elsewhere to safeguard buyers, taking inspiration particularly from a Virginia law that extends renter protections to include land installment contracts.

Community-wide efforts

Lack of access to small mortgages can also affect communities, said Craig J. Richardson, director of the Center for the Study of Economic Mobility at Winston-Salem State University in North Carolina.

The lack of access to small mortgages in the poor East Winston area may have stopped it from bouncing back after the financial crisis, he said, while empowering institutional homebuyers, who have increasingly turned available housing into rentals.

Compared with richer areas in Winston-Salem, property values in East Winston dropped more than 45% since 2013, Richardson and a co-author recently found, following a "huge withdrawal from banks servicing this market."

That has created a vicious circle: a decade and a half ago, about 70% of the neighbourhood’s homes were owner-occupied, Richardson said, while today that figure is less than a third.

In turn, he said, economic development in the area has languished. "It's been very difficult to convince investors to come to this side of the city."

(Reporting by  Carey L. Biron; Editing by Sonia Elks and Clar Ni Chonghaile)