Thousands of homeowners face the risk of losing their homes due to “zombie mortgages” bought by companies — with some forcing foreclosures without their knowledge, according to a shocking report..
Many of the stunned homeowners took out second mortgages during the subprime lending housing bubble between 2004 and 2008 that they believed were written off — only to learn the mortgages have come back to haunt them.
An investigation by NPR found at least 10,000 old second mortgages that foreclosure activity had been initiated on in just the last two years.
‘The numbers to me are very scary,’ Andrea Bopp Stark, an attorney at the National Consumer Law Center, told the outlet.
The problem is feared to be widespread across America.
‘If you’re looking at the number of these foreclosure filings, or at least the attempts to collect on this zombie debt, you’re starting to see the numbers tick up dramatically into the thousands, if not more, in individual jurisdictions,’ David Weber, a professor at the Creighton University School of Law told The New York Times.
‘That’s a lot of activity.’
McDonough told NPR.
When she approached one of the individuals who had driven up to her home, she was told: “We’re selling your house.”
“This is a foreclosure. You are going to lose this house.”
McDonough was stunned. She had owned the home for 17 years and was up on her mortgage payments.
But their was a “zombie” mortgage on her home that she was not aware of.
She purchased the home in 2005 for $365,000 with an “80/20” loan. One mortgage covered 80% of the home’s cost — $292,000 — while the other covered the remaining 20% — equal to $73,000.
“It was the easiest thing I’ve ever applied for,” McDonough told NPR. “I just filled out paperwork and submitted it and I was approved.”
McDonough was making her mortgage payments in the first two years, but the interest shot up after the second year — pushing her monthly bill $700 higher.
When she asked for the mortgage to be modified, she said she was informed by the company, which serviced both loans, that the second mortgage was forgiven.
“I was actually in my kitchen. I was cooking dinner, and I was talking to a representative … and he told me I would never have to make a payment again on the second mortgage,” she said.
“And I just didn’t question any of it ’cause I was so grateful that the loan was modified.”
McDonough said she no longer was receiving statements on the 20% loan. But recently she started getting phone calls asking for money.
Assuming those phone calls were scams, she ignored them.
The then received a letter was from First American National, a company that she had never heard of.
“It had an amount and they wanted a payment … like $77,000,” she said. “I was kind of in disbelief.”
First American National then kept calling and threatening her with foreclosure if she didn’t pay, McDonough told NPR.
When McDonough called the company that serviced the first mortgage, she said she was told it was likely a scam.
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“I was crying on the phone with them, like having a nervous breakdown,” McDonough said.
“And they kept saying like we’re gonna help you. You can’t lose your home through this.”
But her fears were well-founded.
Limited liability companies that are registered in Delaware and whose owners’ identities are shielded by law bought up bundles of mortgages for pennies on the dollar in the wake of the 2008 housing crash — when banks were selling them for dirt cheap as they were going under.
Since housing prices were low after the crash, the mortgages were worthless. But once home values soared in the ensuing years, the investors who bought up the loans were looking to cash in.
McDonough’s home, which she bought for $365,000, is now worth $600,000.
First American National bought her house at auction for $178,500 and is the legal owner of the home. McDonough, however, is still living in her home after filing a lawsuit which alleges the company used unfair and deceptive practices to foreclose on her home.
She continues to make payments on her first mortgage.
“I feel like what happened was a terrible thing,” McDonough said.
“But I’m still, like, really hopeful that I’m going to stay in my home. I’m really hopeful I’m going to win this case.”
McDonough’s lawyers claim that the second mortgage she was told had been forgiven was instead sold in 2020 along with around 600 other mortgages to an LLC connected with First American National.
“We think that they have systemically and deliberately broken the law,” Todd Kaplan, an attorney with the nonprofit Greater Boston Legal Services, told NPR.
First American National, a small New Jersey-based business, is run by Ira Bailey, who told NPR that he had been buying up second mortgages for around 20 years.
Consumer and industry advocacy organizations — including the American Land Title Association (ALTA), National Consumer Law Center (NCLC), National Association of Realtors (NAR) and AARP — are sounding the alarm over a rising trend of elder real estate fraud and financial exploitation in a new jointly created issue brief released on Friday.
The brief includes an overview of key actions that could be considered elder financial abuse, including but not limited to signature forging on legal or financial documents; coercing or “unduly influencing” the signing of such documents; failing to disclose “critical information;” “defrauding older adults out of money or property;” and “inappropriate utilization of authority under a power of attorney (POA).”
According to Federal Trade Commission (FTC) data cited in the brief, U.S. residents ages 60 and older lost more than $1.9 billion to these scams last year alone. Additional data from the FBI’s Internet Crime Complaint Center (IC3) 2023 report showed the cohort lost more than $65 million specifically tied to real estate scams, which impacted approximately 1,498 victims.
Based on the FBI data, this constitutes a 14% increase in elder financial exploitation from 2022 levels.
“Protecting property rights of all Americans is our top concern — and older adults are no exception,“ Elizabeth Blosser, vice president of government affairs at ALTA, said in a statement. “The stark increase in scams, fraud and financial exploitation targeting older adults is deeply concerning, and the private sector and policymakers must come together to combat these schemes, especially as the median age in this country continues to increase.”
NCLC senior attorney Andrea Bopp Stark added that the aging of the U.S. population necessitates additional action by policymakers at the state and federal levels to protect older adults from these kinds of scams.
“Lawmakers and advocates must take these abusive practices head on — strengthening consumer protections for the growing population of older adults and challenging emerging threats to their financial wellbeing,” she said.
Reverse mortgages are not explicitly mentioned in the brief itself, but they are mentioned by Bryan Greene, NAR’s vice president of policy advocacy, among a series of “exploitative tactics.”
“Addressing elder real estate fraud necessitates a collective effort,” Greene said. “NAR continues to advocate on behalf of seniors to shield them from exploitative tactics such as reverse mortgages, property investment and foreclosure-rescue offers. We are proud to work with ALTA, AARP and NCLC to offer these recommendations for states to prevent seniors from being targeted by these increasingly prevalent schemes and safeguard their financial security.”
While federal agencies have issued “fraud bulletins” related to reverse mortgages in the past, these primarily refer to bad actors who aim to manipulate an older victim into obtaining a loan. Reverse mortgages are legitimate products offered under the Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) program, but bad actors may seek to scam a senior out of money under the guise of offering a reverse mortgage on their home.
Jenn Jones, vice president of government affairs, financial security and livable communities at AARP, was more sensitive to such a distinction.
“While elder financial exploitation is often perpetrated by family members or trusted friends, older Americans are also common targets of unscrupulous professionals and strangers looking to commit fraud,” Jones said. “Financial exploitation of any kind wreaks havoc on the lives of older adults and their families, and we need stronger policies, enforcement and public education to combat this widespread crisis.”
The U.S. Department of Housing and Urban Development (HUD) on Friday announced that a proposed change to the Home Equity Conversion Mortgage (HECM) for Purchase (H4P) program has been modified to bar the practice of premium pricing, and it will only allow interested party contributions (IPCs) on H4P closing costs from property sellers, builders, real estate agents and developers.
After concerns were raised in the public comment period following the proposed H4P changes announced late last year — including from AARP — some planned updates will not be implemented, according to a statement from the Federal Housing Administration (FHA). A Mortgagee Letter (ML) detailing the particulars of the policy changes has been released in conjunction with a new entry in the Federal Register.
Changing course
In October, FHA published proposed guidance for the H4P program in the Federal Register. In certain circumstances, the program would allow for inclusion of “an ‘interested party contribution’ [of] up to six percent of the sales price,” according to the original plan. After concerns during the proposal’s comment period were brought to the attention of policymakers, however, HUD and FHA have decided to walk back some of these plans.
“FHA will move forward with its proposal that permits contributions by the property seller, real estate agent, builder, or developer to HECM for Purchase borrowers’ closing costs,” the update said. “However, at this time, FHA will not allow [lenders] and third-party originators (TPO) to make such IPCs, nor will it allow premium pricing to qualify as an eligible funding source to meet the borrower’s minimum required investment.”
The new guidance as published in the Federal Register and in a new ML “also restores FHA’s previous policy that discount points and interest rate buydowns are not allowable closing costs,” FHA explained.
The original effective date as announced last fall remains in effect, which will be April 29, 2024. ML 2024-06 details the particulars of the policy revisions, changes to particular regulations and added that the “model HECM fixed and adjustable rate mortgage payment plans and model Exhibit II – Schedule of Closing Costs have been modified to align with the provisions of this ML.”
Initial concerns
In a letter sent to FHA Commissioner Julia Gordon in December, David Certner, legislative counsel and legislative policy director in the government affairs division at AARP, explained why the group opposed the initially proposed changes to the H4P program.
“We oppose the permitting of mortgagee and third-party originator premium pricing credits to be used toward the down payment,” Certner wrote at the time. “Premium pricing credits are discretionary and can be used as a means to influence a borrower to engage in the transaction. These credits can lead to fair lending violations. In the forward market, there have been cases where lenders do not pass on the full amount of premium pricing credits to consumers, resulting in an enforcement order and penalty fines to the lender.”
Additionally, since HECMs are negatively amortizing, then accepting a higher interest rate in return for a closing credit “is a very costly tradeoff for a consumer, and even more costly for a reverse mortgage transaction since interest costs are added to the loan balance each month,” the letter stated.
While AARP supported IPCs on H4P loans from the seller, real estate agent, builder or developer, the group opposed “permitting mortgagees and third-party originators to contribute to closing costs. Historically, mortgage lenders and originators have been prohibited from contributing to closing costs to protect borrowers.”
Reactions to the changes
Steve Irwin, president of the National Reverse Mortgage Lenders Association (NRMLA), told RMD that the association is disappointed in some aspects of this decision.
“NRMLA, and its members, are disappointed that HUD has had to pull back on certain specific H4P features, which would have better aligned the product with the way things are done on the forward side of the mortgage business,” he said. “We also understand that we must ensure there is clarity for the consumer in how these product features work, and the [resulting] consumer impacts. NRMLA will devote itself to identifying any concerns regarding these features and work to resolve them.”
Reverse mortgage originator Chris Bruser with Mutual of Omaha Mortgage told RMD that he remains excited in general about the closing cost changes and builder incentives, but the discount point changes are discouraging as an industry professional who actively sources H4P business.
“I’m kind of a little bit disappointed in that,” he said. “It would be nice to be able to see that, especially here in Florida, where our closing and third-party costs are quite a bit higher. Any kind of extra help that our borrowers could obtain to lower their investment would be a welcome change.
“But I think at least allowing the credits to be there is a big step. Not allowing the discount points doesn’t necessarily seem like a game changer to me, though it would be nice to have that additional help. Still, I’ll take what we got.”
The National Consumer Law Center (NCLC) quickly lauded the development, according to an announcement issued by the organization.
“Reverse mortgage borrowers take on a complex financial product to reduce housing expenses and maintain stable shelter,” said Sarah Mancini, co-director of advocacy at NCLC. “HUD’s policy announcement today will remove the risk that these older homeowners will be up-charged on their interest rate in ways that would cost them more and eat up their home equity faster.”
The move will also stabilize housing for older Americans, according to Odette Williamson, a senior attorney with NCLC.
“HUD’s actions to strengthen the HECM program are extremely important steps toward increasing stable housing for older adults,” Williamson said. “We look forward to continuing to share information with the agency as it bolsters this crucial loan program.”
Thousands of veterans are facing foreclosure as pandemic-era forbearances end. The new loan program is only available to eligible veterans
WASHINGTON – The Department of Veterans Affairs announced a last-resort program that provides 2.5% interest rate home loans to more than 40,000 veterans who are facing foreclosure.
Through the Veterans Affairs Servicing Purchase (VASP) program, the VA will purchase defaulted VA loans from mortgage servicers, modify the loans and place them in the VA-owned portfolio as direct loans. This allows the VA to work directly with eligible homeowner so the loans and the monthly payments can be adjusted. Borrowers – eligible veterans, active-duty service members and surviving spouses with VA-guaranteed home loans who are experiencing severe financial hardship – will have a fixed 2.5% interest rate.
The program comes after thousands of veteran homeowners were told to pay a lump sum to rectify their pandemic-era forbearances or refinance at higher interest rates. An NPR investigation found upwards of 6,000 borrowers with VA loans in the program are in foreclosure and 34,000 others are delinquent. In December, the VA called on mortgage servicers to pause foreclosures on VA-backed loans.
Consumer advocates at the National Consumer Law Center (NCLC) and the Center for Responsible Lending (CRL) expressed support for the new program and urged the VA to extend the foreclosure pause, currently set to expire on May 31, until the VASP program is widely available.
“The VASP program is badly needed as veteran borrowers have had no meaningful alternatives to foreclosure for over a year,” said Steve Sharpe, an NCLC senior attorney. “The VA must extend the foreclosure pause until VASP is implemented so that all eligible borrowers have fair access to the new program. We also urge VA to eliminate any rules that unnecessarily limit access to VASP for borrowers who previously received unaffordable loan modifications.”
The VA said mortgage servicers will identify qualified borrowers beginning May 31 and submit requests based on a review of all available home retention options and qualifying criteria. Veterans facing financial hardship should work with their mortgage servicers to explore available options, the VA said.
“When a veteran falls on hard times, we work with them and their loan servicers every step of the way to help prevent foreclosure — including offering repayment plans, loan modifications, and more,” said Under Secretary for Benefits Josh Jacobs. “But some veterans still need additional support after those steps, and that’s what VASP is all about. This program will help ensure that when a veteran goes into default, there is an additional affordable payment option that will work in a higher interest rate environment — so they can keep their homes.”
Federal Reserve left its key short-term interest rate unchanged again Wednesday, hinted that rate hikes are likely over and forecast three cuts next year amid falling inflation and a cooling economy.
That’s more rate cuts than many economists expected.
The decision leaves the Fed’s benchmark short-term rate at a 22-year high of 5.25% to 5.5% following a flurry of rate increases aimed at subduing the nation’s sharpest inflation spike in four decades. The central bank has now held its key rate steady for three straight meetings since July.
That provides another reprieve for consumers who have faced higher borrowing costs for credit cards, adjustable-rate mortgages and other loans as a result of the Fed’s moves. Yet Americans, especially seniors, are finally reaping healthy bank savings yields after years of paltry returns.
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Will the Fed raise interest rates again?
The central bank didn’t rule out another rate increase as it downgraded its economic outlook for next year while lowering its inflation forecast. In a statement after a two-day meeting, it repeated that it would assess the economy and financial developments, among other factors, to determine “the extent of any additional (rate hikes) that may be appropriate to return inflation to 2% over time.”
Fed Chair Jerome Powell said at a news conference, noting the Fed’s key rate is “at or near its peak.”
while the Dow Jones Industrial Average closed at a record high after rising 1.4% following the Fed’s signals that it’s probably done lifting rates and is forecasting three cuts next year. The 10-year Treasury was down to about 4% from 4.21% on Tuesday.
Last month, Powell said high Treasury yields, if persistent, likely would constrain the economy and require fewer Fed rate increases,
In its statement Wednesday, however, the central bank didn’t acknowledge the recent decline in Treasury yields, suggesting yields are still relatively high and could spike again, crimping the economy.
“Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation,” the Fed said, repeating the language of its previous statement.
Is inflation really slowing down?
The Fed’s middle-ground approach may have been cemented Tuesday by a mixed report on the consumer price index. The good news was that overall inflation barely budged in November amid falling gasoline prices, pushing down annual price gains to 3.1% from 3.2%, still well above the Fed’s 2% goal.
The Federal Reserve System is the U.S.’s central bank.
When does the Fed meet again?
The first Federal Reserve meeting of the new year will be from Jan. 30 through 31.
Federal reserve calendar
Jan. 30-31
March 19-20
April 30- May 1
June 11-12
July 30-31
Sept. 17-18
Nov. 6-7
Dec. 17-18
The U.S. economy was strong in the third quarter as consumers continued to spend despite high interest rates and inflation.
The value of all services and products generated in the U.S., or GDP, rose at a seasonally adjusted 4.9% for the year in the months spanning July to September, according to the Commerce Department. That was more than twice the 2.1% increase in the previous quarter and the most aggressive pace of growth since the end of 2021 when the economy surged back from a recession sparked by the pandemic.
a recession over the next year, down from the 61% odds forecast in May.
Barclays predicted a loss of roughly 375,000 jobs by the middle of next year. But consumer spending remains robust despite high inflation and interest rates that are making credit card use and consumer loans more expensive. And that may help stave off a recession, says Barclays economist Jonathan Millar.
What does FOMC stand for?
The FOMC is the Federal Open Market Committee, the voting body responsible for setting interest rates. The 12-member committee includes seven members of the Board of Governors and five of the 12 Reserve Bank presidents.
What causes inflation?
Inflation can have many roots. Typically, it’s caused by “a macroeconomic excess of spending over the economy’s relative ability to produce goods and services,” said Josh Bivens, the director of research at the Economic Policy Institute, a left-leaning think tank based in Washington D.C.
That means more people are wanting items and services than there is adequate supply, leading producers to raise prices.
“If everyone in the economy, tomorrow, decided they weren’t going to save any money from their paychecks, and they’re just going to spend every last dollar out of the blue, they would all run to the stores and try to buy things,” Bivens said. “But, producers haven’t produced enough to accommodate that big surge of across-the-board spending. So, you would see prices bid up.”
Inflation can also happen when there are too few producers, or there aren’t enough employees to provide the coveted products and services, Bivens said.
Finally, economies also have some “built-in inflation” to help keep inflation in check. In the U.S., that target is 2%, meaning businesses can raise prices 2% annually year and that shouldn’t overburden consumers. That’s also the typical cost of living raise offered by employers.
Inflation meaning
Inflation is the term for a “generalized rise in prices,” according to Josh Bivens, head of research at the Economic Policy Institute, a left-leaning think tank based in Washington D.C.
Everything from food to rent can become costlier due to inflation. But it is the overall impact that determines what the inflation rate actually is.
“Inflation, though, really is meant to only refer to all goods and services, together, rising in price by some common amount,” Bivens said. The Federal Reserve’s inflation goal is 2%, which means businesses can hike prices by 2% a year and that shouldn’t cause consumers financial distress. Cost of living increases to workers’ pay are also expected to meet that target to ensure consumers can adequately deal with the rising costs of goods and services.
What is CPI?
In November, the Consumer Price Index (CPI) ‒ a measure of the average shift in prices for different products and services ‒ was 3.1%, down slightly from the month before.
Annual inflation is down dramatically from the 9.1% in June 2022 that marked a 40-year high but remains above the 2% target the Fed sees as the level that signals the rate of price increases is under control.
Why is CPI important?
The Federal Reserve watches two key aspects of the economy, price stability and maximum employment, and those are the main factors it takes into account for its interest rate decisions. The CPI is a primary measure the Fed looks at to help determine if prices are “stable.’’
What is the difference between CPI and core CPI?
Core prices don’t count the volatile costs of food and energy items, giving a more accurate window into longer-term trends.
Are wages going up in 2024?
If you’re deemed a top performer at a company that is offering raises, you’ve got a pretty good chance of getting a pay boost next year.
About 3 out of four business leaders told ResumeBuilder.com they intended to give raises. But half of those company executives said only 50% or less of their staff members would see a pay hike, and 82% of the raises would hinge on performance. For those who do manage to get the salary boost, 79% of employers said the pay hikes would be greater than those given in recent years.
Are U.S. Treasury yields rising?
Not recently.
The 10-year Treasury yield was above 5% in November when the Fed kept rates steady for the second consecutive month the first time it had left the key rate unchanged two months in a row in almost two years.
That led to mortgage rates spiking to almost 8% and pushed up other borrowing costs for consumers and businesses. Stocks meanwhile sank close to a recent low, leading Fed Chair Jerome Powell to say such financial pressures could achieve the same cooling effect on the economy as additional rate hikes.
But in the following weeks, 10-year Treasury yields dipped to 4.2% and stocks rebounded. That might make the Fed resist rate cuts in case the economy heats up and causes the broader dip in prices “to stall at an uncomfortably elevated level,” Barclays says.
Barclays and Goldman Sachs forecast that rate cuts won’t happen until the spring, and that there will be only two, to a range of 4.75% to 5%, with more cuts implemented in the next two years.
When will inflation go back to normal?
It may take a little while.
Inflation’s decline likely “won’t show much progress in coming months,” Barclays wrote in a research note.
Overall price hikes have eased significantly since peaking at 9.1% in June 2022, a four-decade high. And in October, broader inflation as well as core prices experienced a dip, leading to a lower 10-year Treasury yield.
But core prices, which exclude the volatile costs of food and energy, will probably rise 0.3% each of the next three months, Goldman Sachs says. Used cars and furniture have been getting cheaper as the supply-chain shortages of the pandemic end. Meanwhile, health care, auto repairs, car insurance and rent continue to get more expensive, as employers pay higher wages to attract workers amid a labor shortage lingering from the global health crisis.
What is core inflation right now?
Core prices, which leave out the more volatile costs of food and energy, bumped up 0.3% in November, slightly more than the 0.2% uptick seen the previous month. That kept the yearly increase at 4%, the lowest rate since September 2021.
New inflation tax brackets
Inflation may also impact the amount of taxes you have to pay.
The Internal Revenue Service said in its annual inflation adjustments report that there will be a 5.4% bump in income thresholds to reach each new level in next year’s tax season.
In 2024, the lowest rate of 10% will apply to individuals with taxable income up to $11,600 and joint filers up to $23,200. The top rate of 37% will apply to individuals earning over $609,350, and married couples filing jointly who make at least $731,200 a year.
The IRS makes these adjustments annually, using a formula based on the consumer price index to account for inflation and stave off “bracket creep,” which happens when inflation shifts taxpayers into a higher bracket though they’re not seeing any real rise in pay or purchasing power.
The 2024/25 increase is less than last year’s 7% increase, but much more than recent years when inflation was below the current 3.1% inflation rate.
Will Social Security get a raise because of inflation?
Yes, but it will be a lot less than what recipients received in 2023.
The cost-of-living adjustment, or COLA, to Social Security benefits will be 3.2% next year. That’s roughly one-third of the 8.7% increase given in 2023, which marked a forty-year high.
The 2024 COLA hike is above the average 2.6% raise recipients have received over the past two decades, but seniors remain concerned about being able to pay their expenses as well as the increasing possibility Social Security benefits will be reduced in coming years, according to a retirement survey of 2,258 people by The Senior Citizens League, a nonprofit seniors group.
How does raising rates lower inflation?
The federal funds rate is what banks pay each other to borrow overnight. If that rate increases, banks usually pass along that extra cost, meaning it becomes more expensive for businesses and consumers to borrow as rates rise on credit cards, adjustable rate mortgages and other loans. That’s why the funds rate is the key mechanism used by the Federal Reserve to calm inflation.
Simply put, companies and consumers don’t borrow as much when loans cost them more, and that means an overheated economy can cool and inflation may dip.
Will credit card interest rates continue to rise this holiday season?
The Fed’s string of rate hikes, aimed at easing the highest inflation in four decades, are a big reason credit card interest rates have reached record highs just in time for the holiday season.
Some retail credit cards now charge more than 33% interest, topping a 30% threshold that stores and banks were previously able to bypass but seldom did – until now.
“They can charge that much,” said Chi Chi Wu, a senior attorney at the nonprofit National Consumer Law Center. “Credit cards can actually charge whatever they want. It’s a little-known fact.”
The domino effect of a high benchmark rate and soaring credit card interest could put many Americans in financial straits this holiday season.
Though some consumers are paring back to deal with high prices, rising debt and shrinking savings, the average shopper expects to spend $1,652 this year on holiday purchases, according to the consultancy Deloitte, more than was typically spent in the last three years.
A lot of the buying will be done with credit cards. In an October poll of 1,036 shoppers by CardRates.com, nearly 4 in 10 respondents said they intend to have holiday credit card debt in the new year.
The nation’s collective credit card debt was $1.08 trillion, at the end of September, a record high. And the average interest rate was 21%, the highest ever documented by the Federal Reserve.
Savings account impact of high rates
The upside to the Fed’s string of rate hikes has been that consumers were able to earn good interest on their savings for the first time in years. Even when the Fed leaves interest rates unchanged, savers can do well.
Unfortunately, most account holders aren’t making the most of that potential opportunity.
Roughly one-fifth of Americans who have savings accounts don’t know how much interest they’re earning, according to a quarterly Paths to Prosperity study by Santander US, part of the global bank Santander. Among those who did know their account’s interest rate, most were earning less than 3%.
But consumers have time to make a change that could enable them to make more from their savings.
“We’re still a long way from (the Fed) beginning to cut rates,” said Greg McBride, chief financial analyst at financial services platform Bankrate. “This is great news for savers, who will continue to enjoy inflation-beating returns in the top-yielding, federally insured online savings accounts and certificates of deposit. For borrowers, interest rates staying higher for a longer period underscores the urgency to pay down and pay off costly credit card debt and home equity lines.”
The string of Fed rate hikes that began in March 2022 has made it costlier for consumers to borrow as interest rates on credit cards and other loans increased dramatically.
At the same time, inflation has made daily needs more expensive, pushing more Americans to lean on credit cards to get by. But lenders have become more reluctant to issue new cards, so in the midst of the holiday season, more shoppers are seeking higher credit limits, experts say.
In October, the application rate for higher limits rose to 17.8% from 11.2% in the same month the previous year, and from 12.0% in 2019, New York Fed data showed.
For some consumers, a higher limit on a card they already have is about their only option.
“After COVID, inflation and interest rates went out of control … people have less emergency funds for car repairs or buying presents,” said Brandon Robinson, president and founder of JBR Associates, which specializes in retirement strategies. “What they’re doing is using more credit card utilization – over 30% or well over 50% of their credit card allowance – and then can’t get approved for another card because their credit rating is down.”
Inflation is leading more Americans to work multiple jobs
The number of Americans working at least two jobs is at its highest peak since before the COVID-19 pandemic, according to federal data, an uptick that may reflect the financial pressure people are feeling amid high inflation.
Almost 8.4 million people had multiple jobs in October, the Labor Department said, a figure that represents 5.2% of the laborforce, the highest percentage since January 2020.
“Paying for necessities has become more of a challenge, and affording luxuries and discretionary items has become more difficult, if not impossible for some, particularly those at the lower ends of the income and wealth spectrums,” Mark Hamrick, senior economic analyst at Bankrate, told USA TODAY in an email.
People may also be moonlighting to sock away cash in case they’re laid off since job cuts typically peak at the start of a new year.
What is the Federal Reserve’s 2024 meeting schedule? Here is when the Fed will meet again.
What is the mortgage interest rate today?
Mortgage rates are falling, so is it time to buy?
It depends.
First of all, the Fed doesn’t directly set mortgage rates, but its actions have an impact. For instance, when the central bank was steadily boosting its key rate, the yield on the 10-year treasury bond went up as well. Because those bonds are a gauge for the interest applied to an average 30-year loan, mortgage rates increased.
But over the past six weeks, mortgage rates have been declining, averaging 7% for a 30-year fixed mortgage. That’s down from almost 7.8% at the end of October, according to data released by Freddie Mac on Dec. 7.
That may be giving some wannabe homeowners the confidence to start house hunting. For the week ending Dec. 1, mortgage applications rose 2.8% from the prior week, according to the Mortgage Bankers Association.
“However, in the big picture, mortgage rates remain pretty high,” says Danielle Hale, senior economist for Realtor.com. “The typical mortgage rate according to Freddie Mac data is roughly in line with what we saw in August and early to mid-September, which were then 20 plus year highs.”
So, many potential buyers may still need to sit on the sidelines, waiting for rates to drop further, says Sam Khater, chief economist for Freddie Mac. Hale and many other experts believe mortgage rates will dip next year.
Interest rate projection 2024
The Fed is expected to cut interest rates next year, though markets and economists disagree about how many rate cuts there will be.
Futures markets forecast there will be four or five rate cuts in 2024, amounting to a quarter of a percentage point each. The cuts, they predict, should start by spring, and ultimately drop interest rates as low as 4% to 4.25%.
But core prices, which leave out the volatile costs of food and energy and are the metric followed more closely by the Fed, ticked up 0.3% in November, higher than the 0.2% increase the month before. That might make the Fed more hesitant to nip rates in the immediate future.
Goldman Sachs and Barclays expect there to be only two rate decreases in 2024. And Fed Chair Jerome Powell has cautioned in recent public remarks that it was “premature” to talk about rate cuts.
November inflation report
Inflation dipped slightly last month, with falling gas prices mitigating the impact of rising rents.
Consumer prices overall increased 3.1% from a year earlier, slightly below the 3.2% rise in October, according to the Labor Department’s consumer price index. That slower pace moves the inflation rate nearer to the level, reached in June, that was the lowest in over two years. Month over month, prices increased a slight 0.1%.
Core prices, however, which leave out the more erratic costs of food and energy and which are more closely monitored by the Fed, increased 0.3% in November after rising 0.2% the previous month. That means core inflation’s yearly increase remained at 4%, though it’s the lowest level since September 2021.
A proposal by the Consumer Financial Protection Bureau to ban medical debt from credit reports is drawing the ire of the financial services industry, which claims not enough has been done to study the root cause of the problematic medical billing: The fractured health care system.
Advocates have been pushing for years for the CFPB to take medical debt off credit reports, claiming millions of consumers are pursued for debts they don’t owe or that are inaccurate. In September, the CFPB released an outline of a sweeping proposal to amend the Fair Credit Reporting Act. The plan was announced by Vice President Kamala Harris from the White House, with CFPB Director Rohit Chopra saying that medical debt has “little predictive value in credit decisions.”
In comments that closed last week about the proposal, financial firms and trade groups said that if enacted, the plan would restrict lending, increase costs and result in more denials of credit to low- and moderate-income consumers. Experts claim the CFPB’s proposal would make credit reports less accurate, increasing risks for lenders.
“Conceptually, the CFPB is getting into a dangerous place, because they’re saying medical debt doesn’t have predictive value — and that’s not their job,” said Kim Phan, a partner at the law firm Troutman Pepper, who focused on privacy and data security. “The industry has the right to decide what has value and what doesn’t.”
The CFPB said it expects to publish a report in December summarizing the feedback it received on its proposal from small businesses that will include written comments from stakeholders. Next year, the bureau plans to issue a notice of proposed rulemaking that will give the public an opportunity to comment on the plan before it is finalized.
Phan said that unless the CFPB scales back the proposal or makes changes, she expects the bureau will be sued by a trade group or credit bureau once a final rule has been issued. Taking medical debt off credit reports impacts a consumer’s credit capacity, which is one of the seven factors of credit used in underwriting decisions, Phan said.
“If a consumer earns $30,000 a year and just took on $100,000 of medical debt, their capacity to take on new credit is much more restricted,” Phan said.
The CFPB estimates that roughly 100 million people struggle with unpaid medical bills. The scope of the problem is so large that roughly 50 consumer groups banded together to urge the CFPB to take action.
Chi Chi Wu, senior attorney at the National Consumer Law Center, said consumers get stuck with unpaid medical bills for many reasons, though the majority are due to an insurance company denying a claim, paying only part of a claim or a health care provider demanding payment.
“Medical bills are complicated and bizarre and bureaucratic because, unlike a credit card, where the consumer has bought something, a third party is involved in the payment process,” said Wu, who is the lead author of the legal manual Fair Credit Reporting. “Everybody knows the health care system in this country is a mess. Consumers are asking why they got a bill when the insurance company was supposed to cover it.”
Still, collectors say that taking medical debt off credit reports does not tackle the underlying problems with medical billing disputes. Consumers will still owe the debt and the CFPB will be taking away a traditional tool that creditors use to spur debtors to pay: The threat of nonpayment that impacts a consumer’s credit score.
“Just because the debt is not on a credit report doesn’t mean the consumer doesn’t have to pay it,” said Jennifer Whipple, president of Collection Bureau Services, a family-owned debt collection agency in Missoula, Mont. “The proposal is not addressing the issue the CFPB is trying to fix in terms of people having insurance billing or denial issues or unsupportable health care.”
Earlier this year, the three credit bureaus, Equifax, Experian and TransUnion, agreed to remove medical debts of $500 or less from credit reports, which represented roughly 70% of all medical debts. Debt collectors want the CFPB to study the impact of that change, with a focus on health care providers not being paid, before removing the remaining 30% of medical debts still on credit reports.
“It’s too important an issue not to study and not to use data-driven analysis,” said Scott Purcell, CEO of ACA International, the trade group for collectors and creditors.
Whipple, who is the treasurer of ACA, said the CFPB’s message to consumers is that they do not have to pay their medical bills because there will be no impact to their credit. That kind of message, she said, could result in some consumers thinking they don’t need to pay for health care coverage at all.
“If the message is that medical bills won’t be on a credit report, then consumers may think they don’t need to pay a high premium every month or maybe even carry health insurance,” Whipple said. “Folks on Medicare or Medicaid will think they don’t owe the debt and so they may not take the time to fill out the forms to continue to get coverage.”
Banning medical debt from credit reports is just one piece of the CFPB’s proposal, which would subject a wide range of companies to the Fair Credit Reporting Act’s requirements. The plan also has been criticized for restricting the sale of so-called credit header data by the three main credit bureaus, which some experts say could potentially cut off critical information to law enforcement agencies.
The FCRA requires that information on credit reports to be accurate, and was intended to provide a way for consumers to dispute erroneous information on credit reports and give creditors an unbiased and fungible metric of a borrower’s ability to repay. In its proposal, the CFPB said that consumer complaints about medical debt underscore how ineffective, time-consuming and costly the dispute process has become. Legal experts say the CFPB’s proposed changes will reverberate throughout the financial ecosystem with unknown consequences.
“Medical debt is an insurance problem, and to say you can’t collect it or report it doesn’t solve the insurance issues and it also doesn’t help poor people,” said Joann Needleman, a practice leader and member of the law firm Clark Hill.
Wu, at the National Consumer Law Center, said consumers often find out about a medical debt when they try to buy a car or refinance their mortgage and are told that they can’t get approved for a loan.
“Consumers will pay the debt because they don’t have time to go back and dispute it,” she said.
Andrew Nigrinis, an economist at Legal Economics LLC and a former CFPB economist, said the CFPB did not provide a valid economic analysis of the impact of the proposal. He also said the CFPB’s research that found removing medical debt would increase credit scores was hardly a surprise.
“It’s the same logic that if you took away mortgage delinquencies from credit reports, then obviously credit scores would go up,” he said. “It’s not a profound result.”
Medical debt is a major problem for states that failed to implement the expansion of Medicaid under the Affordable Care Act and have a high percentage of uninsured residents. In a study he conducted for the collections industry, Nigrinis found that the loss of predictive information on credit reports would result in more lending to unqualified borrowers, higher litigation costs to collect debts, and lost income for medical providers due to nonpayment of services.
“The debt collection industry is very competitive and they pass costs on to consumers,” he said. “Presumably, debt collection rates would go up and so would costs of financing and denials of financing.”
Needleman added that the CFPB “is deciding which debts that a consumer should pay — and that’s not their role.”
The Department of Veterans Affairs (VA) is pausing foreclosures on homes financed with VA loans for six months to help military borrowers in danger of losing their homes, a department spokesperson said in a statement to HousingWire on Monday.
The Veterans Assistance Partial Claim Payment program — which began July 2021 — allowed military borrowers to skip six or 12 mortgage payments during the COVID-19 pandemic if they had a financial hardship. VA borrowers would resume making the regular payments when they were back on their feet and the missed payments would be moved to the end of the loan term.
The VA, however, ended the program in October 2022 despite the mortgage industry urging the department to delay its expiration, forcing borrowers to pay back payments quickly or refinance at higher interest rates.
The department said it will push all mortgage servicers to pause foreclosures of VA-guaranteed loans through May 31, 2024, according to the statement.
The VA’s decision to reverse course comes on the heels of an investigative NPR article reporting that thousands of VA loan borrowers risk losing their homes after the VA ended the assistance program.
About 6,000 borrowers with VA loans who had COVID-19-related forbearances are in the foreclosure process and 34,000 more are delinquent, according to NPR’s article citing data from ICE Mortgage Technology.
The COVID-19 Refund Modification program – intended for borrowers who have not been able to financially recover from the pandemic back to their previous income level – was set to expire at the end of 2023, but is now extended through May 31.
The modification program allows military borrowers to obtain a zero-interest, deferred-payment loan from the VA to cover missed payments and modify their existing VA loan to achieve affordable monthly payments for the duration of the extension, the statement said.
The department plans to launch a new VA Servicing Purchase (VASP) program to allow the VA to purchase defaulted VA loans from mortgage servicers. This will allow federal officials to modify the loans and place them in the VA-owned portfolio as direct loans.
The National Consumer Law Center applauded the VA’s decision saying the foreclosure pause will give VA borrowers a much-needed opportunity to access the VASP program.
“The foreclosure pause is badly needed as veteran borrowers have had no meaningful alternatives to foreclosure for over a year,” said Steve Sharpe, senior attorney at the National Consumer Law Center.
Last week, a group of Democrat U.S. Senators – Sherrod Brown of Ohio, Jon Tester of Montana, Jack Reed of Rhode Island and Tim Kaine of Virginia – wrote a letter urging VA Secretary Denis McDonough to protect military borrowers from foreclosure.
“VA previously offered solutions to help borrowers exit forbearance and get back on track with their payments. But for more than a year, veterans have not had a viable option to bring their mortgages current, leaving them vulnerable to losing their homes,” the letter read.
“In the meantime, tens of thousands of veterans and service members are left with no viable options to get back on track with payments and save their homes. Stories from across the country show that this is already having severe consequences for veterans and their families.”
Over the past year, the department said it helped more than 145,000 military borrowers and their families keep their homes and avoid foreclosure.
“The IDR account adjustment puts everybody closer to the statutory [student loan] cancellation that they could be eligible for under the income-driven repayment plans, regardless of whether or not they enrolled in an IDR plan in the past,” explains Kyra Taylor, a staff attorney focused on student loans at the National Consumer Law Center.
Even if your loans aren’t automatically forgiven, the account adjustment will move you closer to the end of your repayment period and closer to forgiveness if you sign up for an IDR plan, which typically takes 20 or 25 years of full monthly payments.
For borrowers who’ve been in repayment for less than 20 or 25 years, here are answers to questions about the IDR account adjustment, and steps they can take to get the most out of it.
When will the IDR adjustment happen if I don’t get automatic forgiveness?
Borrowers who receive IDR credit under the account adjustment — but not enough to automatically qualify for forgiveness — will see their payment count updated sometime in 2024. The Education Department has not given an exact date yet.
How much IDR credit will I get?
To find out how much credit toward IDR forgiveness you’ll receive under the one-time IDR account adjustment, you can tally past payments yourself. Generally, borrowers get IDR forgiveness after 20 or 25 years on an IDR plan, or 240 or 300 monthly payments, which are capped at a certain percentage of their income.
Log in to your Federal Student Aid account at StudentAid.gov to see how long you’ve been in repayment. For detailed information, including descriptions of specific forbearance or deferment periods, request your account history from your servicer.
The adjustment will include the following past periods, through August 2023, toward the number of monthly payments needed to reach forgiveness:
Any month a borrower was in repayment, even if the payments were late or partial. The type of repayment plan doesn’t matter.
Time spent in forbearance, either periods lasting 12 or more consecutive months or a cumulative 36 or more months.
Any month spent in deferment, other than in-school deferment, before 2013.
Any month spent in economic hardship or military deferments on or after Jan. 1, 2013.
Any months in repayment, forbearance or a qualifying deferment before a loan consolidation.
Any months spent in COVID-19-related forbearance.
Past months spent in default will generally not be included in the recount, though borrowers who enroll in the temporary Fresh Start program to get out of default will get IDR credit from March 2020 through the date they leave default.
How to benefit from the account adjustment
The account adjustment will be automatic for most borrowers, but some borrowers need to take an extra step before the end of 2023. If you want to benefit from the account adjustment to reach loan forgiveness more quickly, you must sign up for an IDR plan.
Consolidate your loans if necessary
Borrowers with certain types of loans will need to consolidate them into direct loans by the end of 2023 to receive the account adjustment.
These types of loans must be consolidated to receive IDR credit if they don’t reach the forgiveness threshold:
Commercially managed FFEL Program loans, i.e., those held by companies like Navient.
Perkins loans.
Health Education Assistance Loan (HEAL) Program loans.
Parent PLUS loans.
If you consolidate loans that were in repayment for different periods of time, the new consolidation loan gets the maximum amount of IDR credit that accrued among the loans, Taylor explains.
Enroll in an IDR plan
Federal student loan borrowers will need to start making payments again this fall. Interest resumed on Sept. 1, and bills will come due in October.
For borrowers who anticipate having a leftover balance after the account adjustment, enrolling in an IDR plan now is very important, says Mike Pierce, executive director of the Student Borrower Protection Center, a nonprofit that advocates for student debt relief. This will allow borrowers to continue making progress toward IDR loan forgiveness once payments restart, he says.
SAVE is a good option for most borrowers. Benefits include halved monthly bills for most borrowers with undergraduate loans, no compounding interest if you make regular payments and faster forgiveness for borrowers with smaller balances.
Some middle- or low-income borrowers could even see $0 monthly payments under SAVE, while working toward loan forgiveness. For these borrowers, SAVE “is basically an extension of the payment pause that you just have to fill out some paperwork for,” Pierce says.
Parent PLUS borrowers are only eligible for the Income-Contingent Repayment plan, which is the “least generous” of the four IDR plans, says Taylor. Monthly ICR payments can be high: they’re capped at 20% of the borrower’s discretionary income, rather than 5% to 10% under the other three IDR plans.
Borrowers with parent PLUS loans should see how close they are to cancellation and whether it’s worth it to consolidate and enroll in ICR as a step toward loan forgiveness, Taylor explains.
What if I’m enrolled in Public Service Loan Forgiveness?
If you have at least one approved PSLF form, you may see your payment count adjusted as early as the fall of 2023. Servicers will continue to adjust PSLF counts monthly until the final adjustment in 2024.
Under the account adjustment, you’ll get PSLF credit for any month, dating back to October 2007, in which you had qualifying employment and were in a repayment status, regardless of the payments made, loan type or repayment plan. Borrowers who qualify for PSLF get loan forgiveness after just 10 years, or 120 monthly payments.
The account adjustment is automatic for all PSLF-eligible Direct Loans, including consolidated and unconsolidated parent PLUS loans — but borrowers with commercially or federally held FFELP loans must consolidate them before the end of 2023 to receive the adjustment.
Use the Federal Student Aid office’s PSLF Help Tool to certify periods of employment and track progress toward loan forgiveness under PSLF.
Contar con una primera o segunda oportunidad de crear crédito con una tarjeta de crédito ha sido más fácil en los últimos años, ya que las empresas de tecnología financiera han creado otras opciones. Estas nuevas tarjetas por lo general evalúan las solicitudes de forma diferente a las tarjetas de crédito tradicionales, con algoritmos y métodos propios que pueden tener menos en cuenta a los puntajes de crédito y fijarse más en factores como sus ingresos o los saldos de sus cuentas bancarias. Los costos más bajos también suelen ser un sello distintivo de estas tarjetas: algunos de estos productos se anuncian sin depósito de garantía (en inglés), sin cuota anual y sin tasa APR (en inglés).
“Muchas fintechs (compañías de tecnología financiera) se enfocan mucho en ofrecer productos a personas que de otra manera no calificarían para ellos en una institución grande”, dice Nick Roberts, director de marketing de Grow Credit, una empresa de tecnología financiera con sede en California. “Algunas fintech se enfocan mucho en ampliar el mercado”.
Si bien muchas de estas empresas relativamente nuevas pueden ayudarle a acumular crédito, hay que tener en cuenta que a veces el camino puede ser accidentado, ya que la empresa que está detrás de la tarjeta sigue expandiéndose.
Anticipe cambios
Todas las empresas de tarjetas de crédito, ya sean o no tradicionales, pueden modificar las condiciones de su cuenta (en inglés), aunque dependiendo de lo que cambie exactamente, deben seguir ciertas pautas.
“Tienen que avisarle con 45 días de anticipación de un aumento de la tasa de porcentaje anual y de cualquier cambio significativo en las condiciones”, dice Lauren Saunders, directora asociada del National Consumer Law Center.
Aun así, en comparación con una tarjeta de crédito más reconocida, una tarjeta alternativa de una fintech tiene más probabilidades de sufrir cambios frecuentes en sus condiciones y funcionalidades. Estas actualizaciones pueden ser novedades bien recibidas o también reducciones frustrantes.
Por ejemplo, una empresa de tarjetas de crédito relativamente nueva puede cambiar de marca o nombre, lo que significa que podrían variar muchas de sus funcionalidades. CreditStacks anunció una tarjeta de crédito con su nombre en 2018, pero en 2020, tanto la empresa como la tarjeta pasaron a llamarse Jasper (en inglés), enviando tarjetas rediseñadas y ampliando el grupo de solicitantes que podrían cumplir los requisitos. Con el tiempo, Jasper pasó a ser una tarjeta de devolución de efectivo para personas con buen crédito.
A pesar del nuevo lanzamiento y rediseño, la tarjeta de crédito de Jasper dejó de existir en 2022.
Grow Credit estrenó una tarjeta de crédito en algunos estados en 2019, y la extendió a todo el país en 2020. La tarjeta permite acumular crédito utilizándola para pagar determinadas facturas o cuentas, hasta un límite bajo de gasto mensual. Está vinculada a un plan de membresía con varios niveles y precios, incluida una opción gratuita. Pero al momento de su lanzamiento, la tarjeta solo contaba con un nivel gratuito.
Con el tiempo, la empresa ha ido incorporando los demás niveles de membresía, que pueden desbloquear y permitir facturas adicionales y límites de gasto mensual más elevados. Según Roberts, estas incorporaciones crearon más opciones de generación de crédito para las personas sin crédito.
Ojo con lo que le llegue a su correo electrónico
TomoCredit, una empresa de tecnología financiera con sede en San Francisco, también ha introducido cambios significativos en las condiciones originales de su tarjeta de crédito. La tarjeta debutó en 2021 sin cuota anual, pero en 2023 las condiciones incluían una cuota mensual (en inglés) de $2.99 y la tarjeta quedó en lista de espera.
La fintech Petal lleva varios años en el sector de las tarjetas de crédito, anunciando tarjetas gratuitas o con cargos bajos para clientes que buscan generar crédito, así como para los que tienen un buen historial crediticio. Sin embargo, en mayo y junio (ambos en inglés) de 2023, Petal informó a determinados titulares de tarjetas existentes de que estarían sujetos a una nueva cuota mensual de membresía.
Jamie Howard, un director de e-learning en Tennessee, era uno de esos titulares. Le dijeron que tendría que pagar una cuota mensual de $8 dólares u optar por no pagar y que le cerraran la cuenta. “Al principio me sorprendió, porque no me agrada tener que pagar cuotas”, dice Howard. “Si opto por no participar, es un componente de tu puntaje de crédito”.
La clausura de una cuenta puede perjudicar el puntaje de crédito (en inglés), ya que podría afectar la utilización del crédito y acortar la antigüedad del historial crediticio. Esa era precisamente la principal preocupación de Howard, dado que había solicitado la tarjeta Petal para generar crédito. Sin embargo, después de unos tres años con la tarjeta, decidió que la cuota mensual no valía la pena porque tiene otras tarjetas de crédito. “Desde entonces me salí del programa”, dice.
Controlar las expectativas
Como en el caso de cualquier producto financiero: investigue antes de solicitarlo. Dependiendo de la empresa de tecnología financiera que se trate, es posible que usted no obtenga la misma experiencia que ofrece un banco tradicional, lo que puede ser parte del compromiso.
“Un problema crónico con las fintech es la falta de servicio humano al cliente”, dice Saunders. “Una de las formas en que pueden abaratar los costos es eliminando las sucursales, eliminando el servicio al cliente en vivo, confiando en el chat y otros canales automatizados o electrónicos. Eso funciona bien, hasta que llega el momento en que uno necesita más”.
No todas las empresas de tecnología financiera funcionan de esta manera, pero es importante saber a qué atenerse. Las opiniones de los clientes en Internet pueden servir de ayuda. Podría ser de provecho obtener una tarjeta, si le ayuda a acumular crédito cuando otras opciones son demasiado caras o le han rechazado una tarjeta de crédito tradicional.
Conforme vaya mejorando su crédito, contar con una nueva tarjeta de crédito (en inglés) de un emisor más consolidado puede servirle de respaldo en caso de que cambien las condiciones de su tarjeta alternativa.
Este artículo fue redactado por NerdWallet y publicado originalmente en inglés por The Associated Press.
Mortgages are essential financial tools that create a pathway to homeownership for millions of Americans each year. In recent years, however, many homebuyers have struggled to obtain small mortgages to purchase low-cost homes, those priced under $150,000.1 This problem has garnered the attention of federal regulators, including the Federal Housing Administration (FHA) and the Consumer Financial Protection Bureau (CFPB), who view small mortgages as important tools to increase wealth-building and homeownership opportunities in financially undeserved communities.2
Research has explored mortgage access at different loan amounts, such as below $100,000 or $70,000, and found that small mortgages are scarce relative to larger home loans. Those analyses show that applications for small mortgages are more likely to be denied than those for larger loans, even when applicants have similar credit scores.3 Although the existing research has identified several possible contributing factors to the shortage of small mortgages, the full spectrum of causes and their relative influence are not well understood.4
The Pew Charitable Trusts set out to fill that gap by examining the availability of small mortgages nationwide, the factors that impede small mortgage lending, and the options available to borrowers who cannot access these loans. Pew researchers compared real estate transaction and mortgage origination data from 2018 to 2021 in 1,440 counties across the U.S.; looked at homeownership statistics; and reviewed the results from Pew’s 2022 survey of homebuyers who have used alternative financing methods, such as land contracts and rent-to-own agreements.5 (See the separate appendices document for more details.) This examination found that:
Small mortgages became less common from 2004 to 2021. Nationally, much of the decline in small mortgage lending is the result of home price appreciation, which continually pushes properties above the price threshold at which small mortgages could finance them. However, even after accounting for price changes, small mortgages are less available nationwide than they were two decades ago, although the decline varies by geography.
Most low-cost home purchases do not involve a mortgage. Despite rising prices, sales of low-cost homesremain common nationwide, accounting for more than a quarter of total sales from 2018 to 2021. However, just 26% of properties that sold for less than $150,000 were financed using a mortgage, compared with 71% of higher-cost homes.
Borrowers who cannot access small mortgages typically experience one of three undesirable outcomes. Some households cannot achieve homeownership, which deprives them of one of this nation’s key wealth-building opportunities. Others pay for their home purchase using cash, though this option is challenging for all but the most well-resourced households and is almost never available to first-time homebuyers. And, finally, some resort to alternative financing arrangements, which tend to be riskier and costlier than mortgages, because in most states they are poorly defined and not subject to robust—or sometimes any—consumer protections.
Structural and regulatory barriers limit the profitability of small mortgage lending. The most significant of these barriers is that the fixed costs of originating a mortgage are disproportionally high for smaller loans. Federal policymakers can help address these challenges by identifying opportunities to modernize certain regulations in ways that reduce lenders’ costs without compromising borrower protections.
Mortgages are the main pathway to homeownership
In the United States, homeownership remains a priority for most families: In one nationally representative survey, 74% of respondents said owning a home is an integral part of the American Dream.6 Some Americans value homeownership for personal reasons, citing it as a better option for their family, their sense of safety and security, and their privacy.7 Still others emphasized homeownership’s financial benefits, noting that owning makes more economic sense than renting, enables them to take advantage of their home’s resale value, and can provide substantial tax benefits.8
But regardless of their reasons for buying homes, most American families rely on mortgages to gain access to homeownership because they cannot afford to purchase a home with cash. According to a survey conducted from July 2021 to June 2022, 78% of homebuyers financed their purchases with mortgages, most of which were fixed-rate loans. Mortgages are even more prevalent among first-time homebuyers: 97% used a mortgage to purchase their starter home.9 Given the predominance of mortgages, it is no surprise that changes in mortgage availability have closely correlated with shifts in the nation’s homeownership rate over the past two decades.10 (See Figure 1.)
Mortgages not only enable homeownership, but they also enhance its financial benefits. In most cases, these loans help borrowers purchase larger or more valuable homes than they could otherwise afford. Fixed-rate mortgages also serve as a hedge against inflation and offer borrowers housing cost certainty in the form of a predictable schedule of payments for the duration of the loan.
In addition, mortgages are subject to robust consumer protections. Most mortgages include inspection and appraisal contingencies, which ensure that homes meet minimum habitability standards and that the sale price reflects the home’s true market value, respectively.11 Further, real estate transactions involving mortgages typically include a clear process for transferring the property’s title from seller to buyer, which is a crucial step in guaranteeing that borrowers can demonstrate ownership of their property. And in the event of default, CFPB rules contain clear foreclosure and delinquency processes that give mortgage borrowers an opportunity to make any missed payments and retain their homes.12
Because of these advantages, financing a home purchase with a mortgage is almost always in buyers’ best interest. However, homebuyers seeking loans under $150,000 are often unable to find a mortgage and so are deprived of the benefits of homeownership, of mortgages, or both.
Small mortgages are scarce
Small mortgages are less common today than they were before the Great Recession, when lenders issued small and large mortgages in roughly equal measure. In 2004, for example, lenders originated 2.7 million mortgages for less than $150,000 (in 2004 dollars) and 2.9 million large mortgages—those of $150,000 or more. But Pew estimates that from 2004 to 2021, small mortgage lending fell by nearly 70% to 830,000 loans a year, while large mortgage lending grew by 52% to 4.4 million loans annually. The decline was more acute in certain parts of the country. For instance, the Federal Reserve Bank of Philadelphia found that small mortgages declined by only 28% in Pennsylvania and Delaware from 2019 to 2021 but fell by 43% in New Jersey over the same span.13
Some of the decrease in small mortgage lending can be explained by rising home prices. As homes become more expensive, fewer properties can be purchased using a small mortgage. And the issue of housing affordability has grown more acute over the past two decades. According to the Zillow Home Value Index, single-family home prices rose faster than the rate of inflation from 2004 to 2021. Furthermore, those increases were largest among lower-priced homes.14 Still, home price appreciation does not fully account for the decline in small mortgage lending. (See Figure 2.)
Although low-cost properties are scarcer than they once were, they continue to be bought and sold in large numbers across the country. But the share of those homes purchased with a mortgage is far lower than that for higher-priced properties. From 2018 to 2021, the 1,440 counties Pew studied collectively recorded about 20 million home sales, of which 5.3 million were for less than $150,000. Although the share of low-cost properties varied based on local market conditions, every county in this analysis recorded at least one low-cost sale. During the same period, lenders originated about 12.1 million mortgages in the counties Pew studied, including roughly 1.4 million for purchases under $150,000.15 Based on these mortgage origination and home sale figures, Pew estimates that about 71% of homes priced at $150,000 or more were financed using a mortgage, compared with just 26% of lower-cost homes. (See Figure 3.) This amounts to a financing gap of 44 percentage points, or about 560,000 home purchases that were not financed with small mortgages.
Importantly, however, this analysis probably overstates the magnitude of the financing gap for two key reasons. First, Pew is unable to observe the physical quality of the homes purchased in the studied counties. Evidence suggests that low-cost homes are more likely than higher-cost homes to have structural deficiencies that disqualify them from mortgage financing. Second, even if small mortgages are readily available, many sellers, and probably some buyers, are likely to prefer cash transactions. (See “Cash purchases” below for more details.) Still, these factors do not fully account for the gap in small mortgage financing.
What happens when people cannot get a small mortgage?
When prospective buyers of low-cost homes cannot access a small mortgage, they typically have three options: turn to alternative forms of financing such as land contracts, lease-purchases, or personal property loans; purchase their home using cash; or forgo owning a home and instead rent or live with family or friends. Each of these outcomes has significant disadvantages relative to buying a home using a small mortgage.
Alternative financing
Many alternative financing arrangements are made directly between a seller and a buyer to finance the sale of a home and are generally costlier and riskier than mortgages.16 For example, personal property loans—an alternative arrangement that finances manufactured homes exclusive of the land beneath them—have median interest rates that are nearly 4 percentage points higher than the typical mortgage issued for a manufactured home purchase.17 Further, research in six Midwestern states found that interest rates for land contracts—arrangements in which the buyer pays regular installments to the seller, often for an agreed upon period of time—ranged from zero to 50%, with most above the prime mortgage rate.18 And unlike mortgages, which are subject to a robust set of federal regulations, alternative arrangements are governed by a weak patchwork of state and federal laws that vary widely in their definitions and protections.19
But despite the risks, millions of homebuyers continue to turn to alternative financing. Pew’s first-of-its-kind survey, fielded in 2021, found that 36 million people use or have used some type of alternative home financing arrangement.20 And a 2022 follow-up survey on homebuyers’ experiences with alternative financing found that these arrangements are particularly prevalent among buyers of low-cost homes. From 2000 to 2022, 50% of borrowers who used these arrangements purchased homes under $150,000. (See the separate appendices document for survey toplines.)
Further, the 2022 survey found that about half of alternative financing borrowers applied—and most reported being approved or preapproved—for a mortgage before entering into an alternative arrangement. Pew’s surveys of borrowers, interviews with legal aid experts, and review of research on alternative financing shed some light on the advantages of alternative financing—despite its added costs and risks—compared with mortgages for some homebuyers:
Convenience. Alternative financing borrowers do not have to submit or sign as many documents as they would for a mortgage, and in some instances, the purchase might close more quickly.21 For example, Pew’s 2022 survey found that just 67% of respondents said they had to provide their lender with bank statements, pay stubs, or other income verification and only 60% had to furnish a credit report, credit score, or other credit check, all of which are standard requirements for mortgage transactions.
Upfront costs. Some alternative financing arrangements have lower down payment requirements than do traditional mortgages.22 Borrowers who are unable to afford a substantial down payment or who want small monthly payments may find alternative financing more appealing than mortgages, even if those arrangements cost more over the long term. For example, in Pew’s 2022 survey, 23% of respondents said they did not pay a down payment, deposit, or option fee. And among those who did have a down payment, 75% put down less than 20% of the home price, compared with 59% of mortgage borrowers in 2021.23
Specifics of a home. Borrowers who prioritize the location or amenities of a specific home over the type, convenience, and cost of financing they use might agree to an alternative arrangement if the seller insists on it, rather than forgo purchasing the home.
Familiarity with seller. Borrowers buying a home from family or friends might agree to a transaction that is preferable to the seller because they trust that family or friends will give them a fair deal, perhaps one that is even better than they would get from a mortgage lender.
However, regardless of a borrower’s reasons, the use of alternative financing is cause for concern because it is disproportionately used—and thus the risks and costs are inequitably borne—by racial and ethnic minorities, low-income households, and owners of manufactured homes. Among Americans who have financed a home purchase, 34% of Hispanic and 23% of Black households have used alternative financing at least once, compared with just 19% of White borrowers. (See Figure 4.) Further, families earning less than $50,000 are seven times more likely to use alternative financing than those earning more than $50,000. And nearly half of surveyed manufactured home owners reported using a personal property loan.24 In all of these cases, expanding access to small mortgages could help reduce historically underserved communities’ reliance on risky alternative financing arrangements.
Cash purchases
Other homebuyers who fail to obtain a small mortgage instead choose to pay cash for their homes. In 2021, about a quarter of all home sales were cash purchases, and that share grew in 2022 amid an increasingly competitive housing market.25 The share of cash purchases is larger among low-cost than higher-cost property sales, which may partly be a consequence of the lack of small mortgages.26 However, although cash purchases are appealing to some homebuyers and offer some structural advantages, especially in competitive markets, they are not economically viable for the vast majority of first-time homebuyers, 97% of whom use mortgages.27
Purchasing a house with cash gives buyers a competitive advantage, compared with using a mortgage. Sellers often prefer to work with cash buyers over those with financing because payment is guaranteed, and the buyer does not need time to secure a mortgage. Cash purchases also enable simpler, faster, and cheaper sales compared with financed purchases by avoiding lender requirements such as home inspections and appraisals. In essence, cash sales eliminate “financing risk” for sellers by removing the uncertainties and delays that can accompany mortgage-financed sales. Indeed, as the housing supply has tightened and competition for the few available homes has increased, purchase offers with financing contingencies have become less attractive to sellers. As a result, some financing companies have stepped in to make cash offers on behalf of buyers, enabling those borrowers to be more competitive but often saddling them with additional costs and fees.
However, most Americans do not have the financial resources to pay cash for a home. In 2019, the median home price was $258,000, but the median U.S. renter had just $15,750 in total assets—far less than would be necessary to buy a house.28 Even households with cash on hand may be financially destabilized by a cash purchase because investing a substantial sum of money into a home could severely limit the amount of money they have available for other needs, such as emergencies or everyday expenses. Perhaps because of the financial challenges, homes purchased with cash tend to be smaller and cheaper than homes bought using a mortgage.29
These challenging economic factors limit the types of homebuyers who pursue cash purchases. Investors—both individual and institutional—make up a large share of the cash-purchase market, and are more likely than other buyers to purchase low-cost homes and then return the homes to the market as rental units.30
Researchers have questioned whether cash purchases are truly an alternative to mortgage financing or whether they fundamentally change the composition of homebuyers. One study conducted in 2016 determined that tight credit standards enacted in the aftermath of the 2008 housing market crash resulted in a large uptick in cash purchases, mostly by investor-buyers.31 More recent evidence from 2020 through 2021 suggests that investor purchases are more common in areas with elevated mortgage denial rates, low home values, and below-average homeownership rates.32 In each of these cases, a lack of mortgage access tended to benefit investors, possibly at the expense of homeowners.
No homeownership
Some prospective homebuyers who are unable to access a small mortgage simply forgo homeownership entirely. Instead of buying, these families may choose to rent or live with friends or family. And although these are not necessarily bad outcomes, they lack the financial advantages of homeownership.
On average, homeowners have a net worth that is more than 40 times that of renters, largely because of the equity they accrue from paying down their mortgage balances and from their homes’ appreciation over time.33 In 2019, the median homeowner had $225,000 of equity, accounting for almost 90% of their overall net worth.34
Further, in rental markets with few vacancies and commensurately high costs, owning a home can cost less per month than renting. Recent evidence suggests that, particularly when mortgage interest rates are low, a mortgage payment for a three-bedroom house can be cheaper than the monthly rent for a three-bedroom apartment.35 Likewise, some evidence suggests that buying an inexpensive starter home costs less than renting in some metropolitan areas in the South and Midwest.36
Importantly, the financial benefits of homeownership are not shared equally throughout the country. Historical patterns of discrimination in mortgage lending and government policy have prevented Black, Hispanic, and Indigenous households from accessing homeownership at the same rate as White households. And many of those structural barriers persist, as evidenced by the Black-White homeownership gap, which was wider in 2020 than it was in 1970.37
Mortgage Denials Play a Small Role in Low Access to Credit
Lenders deny applications for small mortgages more often than those for larger loans. From 2018 to 2021, lenders received about 700,000 small mortgage applications per year for site-built single-family homes, of which they denied 11.8%. In contrast, lenders denied just 7.8% of the roughly 3.6 million applications submitted annually for larger mortgages during the same period.
These differences do not entirely reflect applicants’ creditworthiness, as measured by debt-to-income ratio (a person’s monthly debt divided by their income), loan-to-value ratio (dollar amount of a mortgage as a share of the subject property’s appraised value), or credit scores. Research demonstrates that, even for applicants with similar credit profiles, denial rates are much higher for small mortgages than large ones.38 Pew’s analysis confirms these findings. Lenders denied small mortgage applicants with low debt-to-income ratios (36% and below) 8.8% of the time, compared with 4.7% of the time for larger loan applicants with a similar profile. Likewise, applicants with loan-to-value ratios under 80% were more likely to be denied for a small mortgage than a large one.
However, mortgage denials are not the primary cause of the small mortgage shortage. Pew’s analysis found that if lenders denied applications for small mortgages at the same rate as those for larger mortgages, they would originate about 31,000 more small mortgages each year. Although thousands of borrowers would benefit from lower small mortgage denial rates, those additional loans would increase the share of low-cost properties financed with a mortgage by only about 3 percentage points. These findings suggest that lowering the denial rate is not sufficient to increase access to safe and affordable mortgage financing and that regulators need to do more to improve incentives for lenders to originate small mortgages and boost awareness among borrowers.
Small mortgage lending is not profitable for lenders
Policymakers, consumer advocates, and industry agree that increasing the supply of small mortgages could boost homeownership—especially in underserved, low-cost communities.39 But many mortgage lenders simply do not offer small home loans to borrowers. Of the more than 5,000 lenders that originated mortgages from 2018 to 2021, 38% did not issue a single small mortgage.40
In conversations with Pew, lenders, consumer advocates, and government officials identified several potential structural and regulatory obstacles to small mortgage lending. These include the high fixed cost of origination, commission-based compensation for loan officers, the poor physical quality of many low-cost housing units, and various rules and regulations that help protect consumers but may add cost or complexity to the origination process and could be updated to maintain safety at lower cost to lenders.
Structural barriers
Lenders have repeatedly identified the high fixed cost of mortgage originations as a barrier to small mortgage lending because origination costs are roughly constant regardless of loan amount, but revenue varies by loan size. As a result, small mortgages cost lenders about as much to originate as large ones but produce much less revenue, making them unprofitable. Further, lenders have reported an increase in mortgage origination costs in recent years: $8,243 in 2020, $8,664 in 2021, and $10,624 in 2022.41 In conversations with Pew, lenders indicated that many of these costs stem from factors that do not vary based on loan size, including staff salaries, technology, compliance, and appraisal fees.
Lenders typically charge mortgage borrowers an origination fee of 0.5% to 1.0% of the total loan balance as well as closing costs of roughly 3% to 6% of the home purchase price.42 Therefore, more expensive homes—and the larger loans usually used to purchase them—produce higher revenue for lenders than do small mortgages for low-cost homes.
In addition, standard industry compensation practices for loan officers may limit the availability of small mortgages. Lenders typically employ loan officers to help borrowers choose a loan product, collect relevant financial documents, and submit mortgage applications—and pay them wholly or partly on commission.43 And because larger loans yield greater compensation, loan officers may focus on originating larger loans at the expense of smaller ones, reducing the availability of small mortgages.
Finally, lenders must contend with an aging and deteriorating stock of low-cost homes, many of which need extensive repairs. Data from the American Housing Survey shows that 6.7% of homes valued under $150,000 (1.1 million properties) do not meet the Department of Housing and Urban Development’s definition of “adequacy,” compared with just 2.6% of homes valued at $150,000 or more (1.7 million properties).44 The Federal Reserve Bank of Philadelphia estimates that, despite some improvement in housing quality overall, the total cost of remediating physical deficiencies in the nation’s housing stock nevertheless increased from $126.2 billion in 2018 to $149.3 billion in 2022.45
The poor physical quality of many low-cost properties can limit lenders’ ability to originate small mortgages for the purchase of those homes. For instance, physical deficiencies threaten a home’s present and future value, which makes the property less likely to qualify as loan collateral. And poor housing quality can render many low-cost homes ineligible for federal loan programs because the properties cannot meet those programs’ strict habitability standards.
Regulatory barriers
Regulations enacted in the wake of the Great Recession vastly improved the safety of mortgage lending for borrowers and lenders. But despite this success, some stakeholders have called for streamlining of regulations that affect the cost of mortgage origination to make small mortgages more viable. The most commonly cited of these are certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Qualified Mortgage rule (QM rule), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and parts of the CFPB’s Loan Originator Compensation rule.46
The Dodd-Frank Act requires creditors to make a reasonable, good-faith determination of a consumer’s ability to repay a mortgage. This provision has significantly increased the safety of the mortgage market and protected borrowers from unfair and abusive loan terms—such as unnecessarily high interest rates and fees—as well as terms that could strip borrowers of their equity. Lenders can meet Dodd-Frank’s requirements by originating a “qualified mortgage” (QM), which is a loan that meets the CFPB’s minimum borrower safety standards, including limits on the points, fees, and annual percentage rate (APR) the lender can charge.47 In return for originating mortgages under this provision, known as the QM rule, the act provides protection for lenders from any claims by borrowers that they failed to verify the borrower’s ability to repay and so are liable for monetary damages in the event that the borrower defaults and loses the home.
Some lenders and researchers have suggested that the QM rule has increased the cost of mortgage origination because lenders had to establish new processes to verify borrowers’ ability to repay and adhere to stricter compliance requirements.48 In addition, lenders who cannot keep their charges within the QM rule limits often have to offer credits to lower the borrower-facing fees, which can result in lenders originating the loan at a loss.49 And although 2020 revisions to the QM rule gave lenders more flexibility in calculating a borrower’s ability to repay, the extent to which those changes help lenders keep origination costs in check remains unclear.
Another regulation that lenders and researchers have cited as possibly raising the cost of origination is the CFPB’s Loan Originator Compensation rule. The rule protects consumers by reducing loan officers’ incentives to steer borrowers into products with excessively high interest rates and fees. However, lenders say that by prohibiting compensation adjustments based on a loan’s terms or conditions, the rule prevents them from lowering costs for small mortgages, especially in underserved markets. For example, when making small, discounted, or reduced-interest rate products for the benefit of consumers, lenders earn less revenue than they do from other mortgages, but because the rule entitles loan officers to still receive full compensation, those smaller loans become relatively more expensive for lenders to originate. Lenders have suggested that more flexibility in the rule would allow them to reduce loan officer compensation in such cases.50 However, regulators and researchers should closely examine the effects of this adjustment on lender and borrower costs and credit availability. Although such changes would lower lenders’ costs to originate small mortgages for underserved borrowers, they also could further disincline loan officers from serving this segment of the market and so potentially do little to address the small mortgage shortage.
Lastly, some lenders have identified HOEPA as another deterrent to small mortgage lending. The law, enacted in 1994, protects consumers by establishing limits on the APR, points and fees, and prepayment penalties that lenders can charge borrowers on a wide range of loans. Any mortgage that exceeds a HOEPA threshold is deemed a “high-cost mortgage,” which requires lenders to make additional disclosures to the borrower, use prescribed methods to assess the borrower’s ability to repay, and avoid certain loan terms. Changes to the HOEPA rule made in 2013 strengthened the APR and points and fees standards, further protecting consumers but also limiting lenders’ ability to earn revenue on many types of loans. Additionally, the 2013 revision increased the high-cost mortgage thresholds, revised disclosure requirements, restricted certain loan terms for high-cost mortgages, and imposed homeownership counseling requirements.
Many lenders say the 2013 changes to HOEPA increased their costs and compliance obligations and exposed them to legal and reputational risk. However, research has shown that the changes did not significantly affect the overall loan supply but have been effective in discouraging lenders from originating loans that fall above the high-cost thresholds.51 More research is needed to understand how the rule affects small mortgages.
Regulators and lenders have taken some action to expand access to small mortgages
A diverse array of stakeholders, including regulators, consumer advocates, lenders, and researchers, support policy changes to safely encourage more small mortgage lending.52 And policymakers have begun looking at various regulations to identify any that may inadvertently limit borrowers’ access to credit, especially small mortgages, and to address those issues without compromising consumer protections.
Some regulators have already introduced changes that could benefit the small mortgage market by reducing the cost of mortgage origination. For example, in 2022, the Federal Housing Finance Agency (FHFA) announced that to promote sustainable and equitable access to housing, it would eliminate guarantee fees (G-fees)—annual fees that Fannie Mae and Freddie Mac charge lenders when purchasing mortgages—for loans issued to certain first-time, low-income, and otherwise underserved homebuyers.53 Researchers, advocates, and the mortgage industry have long expressed concern about the effect of G-fees on the cost of mortgages for borrowers, and FHFA’s change may lower costs for buyers who are most likely to use small mortgages.54
Similarly, FHFA’s decision to expand the use of desktop appraisals, in which a professional appraiser uses publicly available data instead of a site visit to determine a property’s value, has probably cut the amount of time it takes to close a mortgage as well as appraisal costs for certain loans, which in turn should reduce the cost of originating small loans without materially increasing the risk of defaults.55
At the same time, some lenders have been exploring the use of special purpose credit programs (SPCPs) to increase access to mortgage financing for low-cost homebuyers from historically disadvantaged communities.56 SPCPs allow lenders to design loan products that address the unique needs of borrowers of color, manufactured home buyers, and residents of areas where alternative financing is prevalent, all of whom have typically been underserved by the mortgage industry.
Other entities, such as nonprofit organizations and community development financial institutions (CDFIs), are also developing and offering small mortgage products that use simpler, more flexible underwriting methods than other mortgages, thus reducing origination costs.57 Where these products are available, they have increased access to small mortgages and homeownership, especially for low-income families and homebuyers of color.
Although these initiatives are encouraging, high fixed costs are likely to continue making small mortgage origination difficult, and the extent to which regulations governing loan origination affect—or might be safely modified to lower—these costs is uncertain. Unless policymakers address the major challenges—high fixed costs and their drivers—lenders and regulators will have difficulty bringing innovative solutions to scale to improve access to small mortgages. Future research should continue to explore ways to reduce costs for lenders and borrowers and align regulations with a streamlined mortgage origination process, all while protecting borrowers and maintaining market stability.
Solutions to small mortgage challenges in underserved communities
Structural barriers such as high fixed origination costs, rising home prices, and poor home quality partly explain the shortage of small mortgages. But borrowers also face other obstacles, such as high denial rates, difficulty making down payments, and competition in housing markets flooded with investors and other cash purchasers. And although small mortgages have been declining overall, the lack of credit access affects some communities more than others, driving certain buyers into riskier alternative financing arrangements or excluding them from homeownership entirely.
To better support communities where small mortgages are scarce, policymakers should keep the needs of the most underserved populations in mind when designing and implementing policies to increase access to credit and homeownership. No single policy can improve small mortgage access in every community, but Pew’s work suggests that structural barriers are a primary driver of the small mortgage shortage and that federal policymakers can target a few key areas to make a meaningful impact:
Drivers of mortgage origination costs. Policymakers should evaluate federal government compliance requirements to determine how they affect costs and identify ways to streamline those mandates without increasing risk, particularly through new financial technology. As FHFA Director Sandra L. Thompson stated in April 2023: “Over the past decade, mortgage origination costs have doubled, while delivery times have remained largely unchanged. When used responsibly, technology has the potential to improve borrowers’ experiences by reducing barriers, increasing efficiencies, and lowering costs.”58
Incentives that encourage origination of larger rather than smaller mortgages. Policymakers can look for ways to discourage compensation structures that drive loan officers to prioritize larger-balance loans, such as calculating loan officers’ commissions based on individual loan values or total lending volume.
The balance between systemic risk and access to credit. Although advocates and industry stakeholders agree that regulators should continue to protect borrowers from the types of irresponsible lending practices that contributed to the collapse of the housing market from 2005 to 2007, underwriting standards today prevent too many customers from accessing mortgages.59 A more risk-tolerant stance from the federal government could unlock access to small mortgages and homeownership for more Americans. For example, the decision by Fannie Mae and Freddie Mac (known collectively as the Government Sponsored Enterprises, or GSEs) and FHA to include a positive rent payment record—as well as Freddie Mac’s move to allow lenders to use a borrower’s positive monthly bank account cash-flow data—in their underwriting processes will help expand access to credit to a wider pool of borrowers.60
Habitability of existing low-cost housing and funding for repairs. Restoring low-cost homes could provide more opportunities for borrowers—and the homes they wish to purchase—to qualify for small mortgages. However, more analysis is needed to determine how to improve the existing housing stock without increasing loan costs for lenders or borrowers.
In addition to reducing structural and regulatory barriers to small mortgage lending, a robust policy response on home financing should focus on borrowers who are acutely affected by the lack of small mortgages. Federal policymakers should look for opportunities to expand existing programs and policies for communities that have historically been excluded from homeownership and mortgage access, particularly:
The Duty to Serve rule, which directs the GSEs to improve access to mortgage financing for borrowers of modest means in three underserved markets: manufactured housing, rural communities, and areas requiring funds to preserve affordable housing. Homebuyers in these markets often require a small mortgage to purchase a home, so the GSEs could seek to link their Duty to Serve obligations with small mortgage lending in these markets.
Equitable Housing Finance Plans, which are three-year strategies that the GSEs develop to promote equitable access to affordable and sustainable housing for disadvantaged groups, particularly Black and Hispanic communities. People in these communities are less likely to own a home and more likely to use alternative financing than the overall population, which probably indicates an unmet demand for mortgages. The GSE leadership should consider adding an objective to their plans related to refinancing alternative financing arrangements—which the plans’ target communities disproportionally use—into mortgages.
SPCPs, which can help lenders better serve specific populations that would otherwise be denied credit or receive it on less favorable terms. Policymakers should encourage the creation and use of these programs for underserved populations in low-cost areas where there is a special need for small mortgages and measure the impacts.
Future Pew research will explore not only important questions about the barriers to small mortgage origination but also the strategies that policymakers can use to expand the nation’s affordable housing stock, improve the habitability of existing low-cost homes, and ensure that small mortgages are more accessible and competitive in the marketplace.
Conclusion
Mortgages are vital financial tools that enable homeownership and wealth-building opportunities for millions of Americans each year. However, the scarcity of small mortgages deprives some prospective borrowers of homeownership opportunities and drives others to buy their homes with cash or risky alternative financing arrangements.
To address this problem, policymakers should aim to expand mortgage access and the overall safety of financing for low-cost homes by reducing the structural and regulatory constraints that increase lenders’ costs and make small mortgages unprofitable, and establishing strong consumer protections for alternative arrangements. In addition, federal agencies and lawmakers can reduce racial disparities in mortgage lending by prioritizing Black, Hispanic, and Indigenous households in the development and implementation of small mortgage and alternative financing programs. Together, these initiatives would help bring homeownership opportunities to more Americans.
This brief also benefited from the valuable insights of Dan Gorin, lead supervisory policy analyst, Federal Reserve Board of Governors; Roberto Quercia, professor, the University of North Carolina at Chapel Hill; Craig Richardson, professor, Winston-Salem State University; and Sabiha Zainulbhai, senior policy analyst, New America. Although they reviewed drafts of the brief, neither they nor their institutions necessarily endorse the findings or conclusions.
This brief was researched and written by Pew staff members Tracy Maguze, Tara Roche, and Adam Staveski. The project team thanks current and former colleagues Nick Bourke, Ryan Canavan, Jennifer V. Doctors, David East, Anne Holmes, Alex Horowitz, Dave Lam, Omar Antonio Martínez, Cindy Murphy-Tofig, Tricia Olszewski, Reagan Ortiz, Travis Plunkett, Andy Qualls, Ryland Staples, Drew Swinburne, and Mark Wolff for providing important communications, creative, editorial, and research support for this work.
Endnotes
Pew defines small mortgages as loans under $150,000. For the purposes of this study, loan values are adjusted for inflation to reflect 2021 dollars unless otherwise noted. This value is based on conversations with mortgage lenders and on an observed decline in lending below that threshold over the past decade. Additionally, for the purposes of this paper, low-cost homes are those priced at less than $150,000, also in 2021 dollars. This price range is consistent with the majority of purchases financed with small mortgages. The median down payment among small mortgage borrowers is just 5%, and as a result, 75% of small mortgages are used to purchase a home under $157,500, although some borrowers do pair small mortgages with larger down payments to purchase higher-cost homes.
Request for Information Regarding Small Mortgage Lending, 87 Fed. Reg. 60186-87 (Oct. 4, 2022); Request for Information Regarding Mortgage Refinances and Forbearances, 87 Fed. Reg. 58487-92 (Sept. 27, 2022).
U.S. Department of Housing and Urban Development, “Financing Lower-Priced Homes: Small Mortgage Loans” (2022), https://www.huduser.gov/portal/portal/sites/default/files/pdf/Financing-Lower-Priced-Homes-Small-Mortgage-Loans.pdf.
S. Zainulbhai et al., “The Lending Hole at the Bottom of the Homeownership Market” (New America, 2021), https://www.newamerica.org/future-land-housing/reports/the-lending-hole-at-the-bottom-of-the-homeownership-market/; U.S. Department of Housing and Urban Development, “Financing Lower-Priced Homes”; A. McCargo et al., “Small-Dollar Mortgages for Single-Family Residential Properties” (Urban Institute, 2018), https://www.urban.org/research/publication/small-dollar-mortgages-single-family-residential-properties; E. Goldstein and K. DeMaria, “Small-Dollar Mortgage Lending in Pennsylvania, New Jersey, and Delaware” (Federal Reserve Bank of Philadelphia, 2022), https://www.philadelphiafed.org/community-development/credit-and-capital/small-dollar-mortgage-lending-in-pennsylvania-new-jersey-and-delaware; L. Goodman, B. Bai, and W. Li, “Real Denial Rates: A Better Way to Look at Who Is Receiving Mortgage Credit” (working paper, Urban Institute, 2018), https://www.urban.org/sites/default/files/publication/98823/real_denial_rates_1.pdf; A. McCargo, B. Bai, and S. Strochak, “Small-Dollar Mortgages: A Loan Performance Analysis” (Urban Institute, 2019), https://www.urban.org/sites/default/files/publication/99906/ small_dollar_mortgages_a_loan_performance_analysis_2.pdf.
Federal Financial Institutions Examination Council, Home Mortgage Disclosure Act, 2018-2021, https://ffiec.cfpb.gov/data-browser/; Zillow Group Inc., Zillow Transaction and Assessment Database, 2018-21, https://www.zillow.com/research/ztrax/. This analysis uses data on mortgage transactions from the HMDA database, the most comprehensive source of information on mortgage lending in the United States. Mortgage lenders report application-level information directly to the CFPB, which compiles and republishes the data for public use. Data on home sales was provided by Zillow through Zillow’s Transaction and Assessment Database (ZTRAX). More information on accessing the data can be found at https://www.zillow.com/research/ztrax/. The results and opinions are those of the authors and do not reflect the position of Zillow Group.
Bankrate, “Nearly Two-Thirds Say Affordability Factors Are Holding Them Back From Homeownership” (Bankrate.com, 2022), https://www.bankrate.com/pdfs/pr/20220330-march-fsp.pdf.
D. Sackett and K. Handel, The Tarrance Group, letter to Woodrow Wilson Center, “Key Findings From National Survey of Voters,” May 21, 2012, https://www.wilsoncenter.org/sites/default/files/media/documents/article/keyfindingsfromsurvey.pdf.
Ibid.
National Association of Realtors, “Profile of Home Buyers and Sellers” (2022), https://www.nar.realtor/sites/default/files/documents/2022-highlights-from-the-profile-of-home-buyers-and-sellers-report-11-03-2022_0.pdf.
A. Acolin, L. Goodman, and S.M. Wachter, “Accessing Homeownership With Credit Constraints,” Housing Policy Debate 29, no. 1 (2019): 108-25, https://www.tandfonline.com/doi/full/10.1080/10511482.2018.1452042?casa_token=5ZjHGNxo1VoAAAAA%3AtLKWk_xn7JT3Uz2G7T_zziEuPZa0NlarhJ-tGl6m83DgxB6rq-IYSU7eZNI9mIwBAFx5o7BGbulINcjA.
N. Bourke, T. Roche, and C. Hatchett, “Homeowners With Risky Alternatives to Traditional Mortgages Eligible for COVID-19 Relief Money,” The Pew Charitable Trusts, Nov. 1, 2021, https://www.pewtrusts.org/en/research-and-analysis/articles/2021/11/01/homeowners-with-risky-alternatives-to-traditional-mortgages-eligible-for-covid19-relief-money.
Goldstein and DeMaria, “Small-Dollar Mortgage Lending in Pennsylvania, New Jersey, and Delaware.”
Zillow Group Inc., “Zillow Home Value Index (ZHVI),” 2000-22, https://www.zillow.com/research/data/.
Some borrowers use small mortgages to purchase properties valued at more than $150,000, but Pew is primarily interested in expanding homeownership opportunities to underserved populations, so this analysis considers only low-cost properties.
The Pew Charitable Trusts, “What Has Research Shown About Alternative Home Financing in the U.S.?” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/04/what-has-research-shown-about-alternative-home-financing-in-the-us.
Consumer Financial Protection Bureau, “Manufactured Housing Finance: New Insights From the Home Mortgage Disclosure Act Data” (2021), https://files.consumerfinance.gov/f/documents/cfpb_manufactured-housing-finance-new-insights-hmda_report_2021-05.pdf.
A. Carpenter, T. George, and L. Nelson, “The American Dream or Just an Illusion? Understanding Land Contract Trends in the Midwest Pre- and Post-Crisis” (Joint Center for Housing Studies of Harvard University, 2019), 9, https://www.jchs.harvard.edu/sites/default/files/media/imp/harvard_jchs_housing_tenure_symposium_carpenter_george_nelson.pdf.
The Pew Charitable Trusts, “What Has Research Shown?”; National Consumer Law Center, “Summary of State Land Contract Statutes” (2021), https://www.pewtrusts.org/en/research-and-analysis/white-papers/2022/02/less-than-half-of-states-have-laws-governing-land-contracts.
The Pew Charitable Trusts, “Millions of Americans Have Used Risky Financing Arrangements to Buy Homes” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/04/millions-of-americans-have-used-risky-financing-arrangements-to-buy-homes.
H.K. Way, “Informal Homeownership in the United States and the Law,” Saint Louis University Public Law Review XXIX, no. 113 (2010): 113-92, https://law.utexas.edu/faculty/hway/informal-homeownership.pdf.
Ibid.
HMDA data for 2022 was not available at time of publication.
The Pew Charitable Trusts, “Millions of Americans Have Used Risky Financing Arrangements to Buy Homes.”
National Association of Realtors, “Realtors Confidence Index Survey” (2022), https://cdn.nar.realtor/sites/default/files/documents/2022-09-realtors-confidence-index-10-20-2022.pdf; D. Anderson, “Share of Homes Bought With All Cash Hits Highest Level Since 2014,” Redfin, https://www.redfin.com/news/all-cash-home-purchases-fha-loans-october-2022/.
T. Malone, “Single-Family Investor Activity Bounces Back in the First Quarter of 2022” (CoreLogic, 2022), https://www.corelogic.com/intelligence/single-family-investor-activity-bounces-back-in-the-first-quarter-of-2022/.
Federal Reserve Board, Survey of Consumer Finances, 1989-2019, https://www.federalreserve.gov/econres/scf/dataviz/scf/table/#series:Transaction_Accounts;demographic:agecl;population:all;units:median. In 2019, the median balance in the checking and savings accounts of Americans younger than 35 was just $3,240; it jumps to $5,620 for accountholders ages 55 to 64.
Ibid.
S. Riley, A. Freeman, and J. Dorrance, “Alternatives to Mortgage Financing for Manufactured Housing” (The University of North Carolina at Chapel Hill Center for Community Capital, 2021), https://www.pewtrusts.org/-/media/assets/2022/03/alternatives-to-mortgage-financing-for-manufactured-housing.pdf.
L. Goodman, J. Zhu, and B. Bai, “Overly Tight Credit Killed 1.1 Million Mortgages in 2015,” Urban Wire (blog), Urban Institute, Nov. 21, 2016, https://www.urban.org/urban-wire/overly-tight-credit-killed-11-million-mortgages-2015.
E. Dowdall et al., “Investor Home Purchases and the Rising Threat to Owners and Renters: Tales From 3 Cities” (Nowak Metro Finance Lab, 2022), https://drexel.edu/~/media/Files/nowak-lab/220923_InvestorHomePurchases_Final.ashx?la=en.
Federal Reserve Board, Survey of Consumer Finances, 2019, https://www.federalreserve.gov/econres/scfindex.htm.
Ibid.
ATTOM Data Solutions, “Owning a Home More Affordable Than Renting in Nearly Two Thirds of U.S. Housing Markets,” Jan 7, 2021, https://www.attomdata.com/news/market-trends/home-sales-prices/attom-data-solutions-2021-rental-affordability-report/.
D. Olick, “Here’s Where Owning a Home Is Cheaper Than Renting One,” CNBC, Feb. 7, 2020, https://www.cnbc.com/2020/02/07/where-owning-a-home-is-cheaper-than-renting-one.html.
The Pew Charitable Trusts, “What Has Research Shown?,” 5.
Goodman, Bai, and Li, “Real Denial Rates.”
Consumer Financial Protection Bureau, “Request for Information: Mortgage Refinances and Forbearances,” Sept. 27, 2022, https://www.regulations.gov/document/CFPB-2022-0059-0001/comment; U.S. Department of Housing and Urban Development, “Request for Information Regarding Small Mortgage Lending,” Oct. 4, 2022, https://www.regulations.gov/docket/HUD-2022-0076/comments.
Alan S. Kaplinsky et al., “DOJ Fair Lending Focus Continues in Settlement of Case Challenging Lender’s Minimum Loan Amount Policy by the Consumer Financial Services and Mortgage Banking Groups,” Casetext, https://casetext.com/analysis/doj-fair-lending-focus-continues-in-settlement-of-case-challenging-lenders-minimum-loan-amount-policy-by-the-consumer-financial-services-and-mortgage-banking-groups. Although some lenders might not originate small mortgages mainly because they operate primarily in high-cost areas, others may require minimum loan sizes, either formally or informally, that exclude low-cost borrowers. The U.S. Department of Justice ruled in 2012 that setting minimum loan sizes of $400,000 or more violates the Fair Housing Act and the Equal Credit Opportunity Act, but whether minimum thresholds of $150,000 are unlawful remains unclear.
Mortgage Bankers Association, “Chart of the Week—July 23, 2021 Retail Production Channel: Cost to Originate ($ Per Closed Loan),” July 23, 2021, https://newslink.mba.org/mba-newslinks/2021/july/mba-newslink-monday-july-26-2021/mba-chart-of-the-week-july-23-2021-retail-production-channel-cost-to-originate/; Mortgage Bankers Association, “MBA: 2022 IMB Production Profits Fall to Series Low,” MBA Newslink, https://newslink.mba.org/mba-newslinks/2023/april/mba-2022-imb-production-profits-fall-to-series-low/.
K. Graham, “Mortgage Origination Fee: The Inside Scoop,” Rocket Mortgage LLC, https://www.rocketmortgage.com/learn/mortgage-origination-fee; M. Crace, “Closing Costs: What Are They, and How Much Will You Pay?,” Rocket Mortgage LLC, https://www.rocketmortgage.com/learn/closing-costs.
Zillow Inc., “How Is Your Loan Officer Paid?,” https://www.zillow.com/blog/how-is-your-loan-officer-paid-500/.
U.S. Census Bureau, American Housing Survey (2021), https://www.census.gov/programs-surveys/ahs/data/2021/ahs-2021-public-use-file–puf-/ahs-2021-national-public-use-file–puf-.html.
E. Divringi, “Updated Estimates of Home Repairs Needs and Costs and Spotlight on Weatherization Assistance” (Federal Reserve Bank of Philadelphia, 2023), https://www.philadelphiafed.org/community-development/housing-and-neighborhoods/updated-estimates-of-home-repairs-needs-and-costs-and-spotlight-on-weatherization-assistance.
U.S. Department of Housing and Urban Development, “MBA Response to FHA RFI Regarding Small Mortgage Lending,” Dec. 5, 2022, https://www.regulations.gov/comment/HUD-2022-0076-0025; U.S. Department of Housing and Urban Development, “New America and CSEM Response to Docket No FR-6342-N-01 on Small Mortgage Lending,” Dec. 5, 2022, https://www.regulations.gov/comment/HUD-2022-0076-0015.
To qualify, loans must meet three criteria: They cannot have negative amortization, interest-only payments, or balloon payments; the total points and fees charged cannot exceed 3% of the loan amount; and the term must be 30 years or less. They also must satisfy at least one of the following three criteria: The borrower’s total monthly debt-to-income ratio must be 43% or less; the loan must be eligible for purchase by Fannie Mae or Freddie Mac or insured by the FHA, U.S. Department of Veterans Affairs, or U.S. Department of Agriculture; or the loan must be originated by insured depositories with total assets of less than $10 billion, but only if the mortgage is held in portfolio.
F. D’Acunto and A.G. Rossi, “Regressive Mortgage Credit Redistribution in the Post-Crisis Era,” The Review of Financial Studies 35, no. 1 (2022): 482-525, https://academic.oup.com/rfs/article-abstract/35/1/482/6136188?redirectedFrom=fulltext; Freddie Mac, “Cost to Originate Study: How Digital Offerings Impact Loan Production Costs” (2021), https://sf.freddiemac.com/content/_assets/resources/pdf/report/cost-to-originate.pdf; T. Hogan, “Costs of Compliance With the Dodd-Frank Act” (Rice University’s Baker Institute for Public Policy, 2019), https://www.bakerinstitute.org/research/dodd-frank-costs-compliance.
K. Berry, “Fed’s Rate Hikes Are Tanking the Mortgage Market,” American Banker, Oct. 24, 2022, https://www.americanbanker.com/news/feds-rate-hikes-are-tanking-the-mortgage-market.
Mortgage Bankers Association, “MBA Members Urge Bureau to Change Loan Originator Compensation Rule,” MBA Newslink, Oct. 24, 2018, https://newslink.mba.org/mba-newslinks/2018/october/mba-newslink-wednesday-10-24-18/mba-members-urge-bureau-to-change-loan-originator-compensation-rule/.
Y. Benzarti, “Playing Hide and Seek: How Lenders Respond to Borrower Protection,” TheReview of Economics and Statistics (2022): 1-25, https://direct.mit.edu/rest/article-abstract/doi/10.1162/rest_a_01167/109257/Playing-Hide-and-Seek-How-Lenders-Respond-to?redirectedFrom=fulltext; Consumer Financial Protection Bureau, “Manufactured Housing Finance,” 25-27.
Consumer Financial Protection Bureau, “Request for Information: Mortgage Refinances and Forbearances.”
Federal Housing Finance Agency, “FHFA Announces Targeted Pricing Changes to Enterprise Pricing Framework,” news release, Oct. 24, 2022, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Targeted-Pricing-Changes-to-Enterprise-Pricing-Framework.aspx. G-fees are based on the individual mortgage’s product type and credit risk attributes and help Fannie and Freddie cover administrative costs and credit losses from borrower defaults. However, these fees also increase loan origination costs.
Americans for Financial Reform, “Joint Letter: FHFA RFI on PACE Loans,” March 16, 2020, https://ourfinancialsecurity.org/2020/03/joint-letter-fhfa-rfi-pace-loans/; G. Kromrei, “Industry to Congress: G-Fees Aren’t Your ‘Piggybank,’” HousingWire, July 23, 2021, https://www.housingwire.com/articles/industry-to-congress-g-fees-arent-your-piggybank/; L. Goodman et al., “Guarantee Fees—an Art, Not a Science” (Urban Institute, 2014), https://www.urban.org/sites/default/files/publication/22841/413202-Guarantee-Fees-An-Art-Not-a-Science.PDF.
Federal Housing Finance Agency, “FHFA Announces Two Measures Advancing Housing Sustainability and Affordability,” news release, Oct. 18, 2021, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Two-Measures-Advancing-Housing-Sustainability-and-Affordability.aspx.
S. Lee, “How Mortgage, Housing Industries Tackled Affordability in 2022,” National Mortgage News, Dec. 29, 2022, https://www.nationalmortgagenews.com/list/how-mortgage-housing-industries-tackled-affordability-in-2022; Wells Fargo, “Wells Fargo Announces Strategic Direction for Home Lending: A Smaller, Less Complex Business Focused on Bank Customers and Minority Communities,” news release, Jan. 10, 2023, https://newsroom.wf.com/English/news-releases/news-release-details/2023/Wells-Fargo-Announces-Strategic-Direction-for-Home-Lending-A-Smaller-Less-Complex-Business-Focused-on-Bank-Customers-and-Minority-Communities/default.aspx.
A. McCargo et al., “The MicroMortgage Marketplace Demonstration Project: Building a Framework for Viable Small-Dollar Mortgage Lending” (Urban Institute, 2020), https://www.urban.org/research/publication/micromortgage-marketplace-demonstration-project; Hurry Home, “A New Way to Be a Homeowner,” https://www.hurryhome.io/.
Federal Housing Finance Agency, “FHFA Announces Inaugural Housing Finance TechSprint,” news release, April 4, 2023, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Inaugural-Housing-Finance-TechSprint.aspx.
L. Goodman, J. Zhu, and T. George, “Four Million Mortgage Loans Missing from 2009 to 2013 Due to Tight Credit Standards,” Urban Wire (blog), Urban Institute, April 2, 2015, https://www.urban.org/urban-wire/four-million-mortgage-loans-missing-2009-2013-due-tight-credit-standards.
Fannie Mae, “Fannie Mae Introduces New Underwriting Innovation to Help More Renters Become Homeowners,” news release, Aug. 11, 2021, https://www.fanniemae.com/newsroom/fannie-mae-news/fannie-mae-introduces-new-underwriting-innovation-help-more-renters-become-homeowners; Freddie Mac, “Freddie Mac Takes Further Action to Help Renters Achieve Homeownership,” news release, June 29, 2022, https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-takes-further-action-help-renters-achieve; Freddie Mac, “Freddie Mac Announces Underwriting Innovation to Help Lenders Qualify More Borrowers for a Mortgage,” news release, Oct. 17, 2022, https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-announces-underwriting-innovation-help-lenders; U.S. Department of Housing and Urban Development, “Federal Housing Administration Expands Access to Homeownership for First-Time Homebuyers Who Have Positive Rental History,” news release, Sept. 27, 2022, https://www.hud.gov/press/press_releases_media_advisories/HUD_No_22_187.
Editor’s note: This brief was updated July 3, 2023, to recognize the peer reviewers and Pew staff members who contributed to its development.