Big problem getting a little mortgage

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Good luck if you want a mortgage for less than $50,000. A small-dollar mortgage is hard to get, and that’s a problem, say Ellen Seidman and Bing Bai, in a report “Where have all the small loans gone?”) for the Urban Institute.

“The absence of small loans may seem insignificant in high-cost markets, but in cities like Kalamazoo, Michigan, and Tampa, Florida, a significant portion of the housing stock sells for $50,000 or less,” they write. “And if potential buyers can’t get a mortgage for these houses, they’ll miss that important first rung on the homeownership ladder that helps both families and neighborhoods.”

They say that, in Tampa in 2014, just 614 borrowers got mortgages for under $50,000, even though there were 177,000 area properties worth less than $50,000.

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Why small mortgages are rare

Bai and Seidman did research that concluded that federal affordable-lending regulations aren’t to blame for the dearth of small mortgages. Instead, 2 factors seem to be at work:

  • People who are in the market for very inexpensive houses may be more likely to have flawed credit.
  • Lenders find small mortgages unattractive because they’re not as profitable as larger mortgages.

“It’s always been the case that small loans are less profitable,” Bai says in an interview. Many costs of originating a mortgage are fixed, but the lender’s profit is related to the size of the mortgage: the larger the loan amount, the more profitable the loan.

How people are affected

When small mortgages are hard to find, you end up with a combination of 3 results:

  1. Fewer sales than you would have otherwise.
  2. More all-cash sales to investors. Some of these are turned into rentals, shrinking the pool of owner-occupied housing.
  3. And “very unfortunate financing vehicles, like land contracts,” Bai says. “Those don’t have consumer protections like mortgages have.”

Land contracts are a type of a lease-to-own arrangement. Bai says that, with some land contracts, one missed payment can forfeit years of on-time payments that were building up equity for a down payment.

A lot of low-priced houses, especially in hard-hit cities such as Detroit, are dilapidated and need substantial fixing up. “It’s very hard, not only to get a mortgage to purchase a home, but also for the rehab,” Bai says.

Read about Federal Housing Administration-insured mortgages that finance repairs and improvements, too.

Bai and Seidman say they don’t know what the solutions are. But they say the lack of small mortgages is a problem — and the 1st step toward solving a problem is identifying it.

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Mortgage rates this week

Good news for homebuyers: Mortgage rates dropped a little in Bankrate’s weekly survey. Mortgage rates had increased 3 weeks in a row before this week’s decline. The average 30-year fixed-rate mortgage fell 7 basis points to 3.56%. The average 15-year fixed mortgage fell 6 basis points to 2.83%. The average 5/1 ARM fell 7 basis points to 3.01%.

Check out our mortgage calculator to estimate your monthly payments and see the effect of adding extra payments.

Graph of the week

Bank of America surveyed parents who were looking to buy homes, and 90% said school quality is extremely important or somewhat important. Not exactly shocking. Nonparents should take heed, says Kathy Cummings, homeownership solutions education executive for Bank of America.

“Even if you don’t have children and are not planning to have children, choosing a home in a good school district is really going to help your resale value,” Cummings says.

I observed that this result was obvious, and Cummings agrees that it just makes common sense. But now the bank has data to back up everyone’s intuition. “The survey was done because 1 of the things that the bank wants to know is what drives the decisions behind customers’ thinking,” she says.

The people who benefit the most from this information are those who don’t think school quality is important because they don’t plan to have children, or their kids are grown, or they plan to place their children in private schools. These folks still would benefit from considering how school quality affects resale value, she says.

Factoid of the week

The hottest housing market in July was Vallejo-Fairfield, California, according to the National Association of Realtors’ “Hotness Index,” followed by Dallas-Fort Worth-Arlington and the Denver metro area.

Nationally, the median number of days that homes have been listed on was 68 days in July. In Vallejo-Fairfield, it was 36 days. In the DFW Metroplex, it was 40 days, and in the Denver area, 31 days.

If judged only by median number of days on market, Denver would top the list, but’s methodology includes pageviews per market on its website.

Many of July’s hottest housing markets are in northern California. Columbus, Ohio,
found its way onto the list, too. Hotness Index for July
Rank Market Median days listed
1 Vallejo-Fairfield, California 36 days
2 Dallas-Fort Worth-Arlington, Texas 40 days
3 Denver-Aurora-Lakewood, Colorado 31 days
4 San Francisco-Oakland-Hayward, California 31 days
5 Stockton-Lodi, California 38 days
6 Columbus, Ohio 44 days
7 San Diego-Carlsbad, California 41 days
8 Santa Cruz-Watsonville, California 42 days
9 Sacramento–Roseville–Arden-Arcade, California 42 days
10 Santa Rosa, California 43 days

Home listing of the week

Big problem getting a little mortgage

South of Sevierville, Tennessee, and just north of my favorite national park, Great Smoky Mountains, you can find this 2-bedroom, 2-bathroom house that hangs almost directly over the the west prong of the Little Pigeon River with an asking price of $300,000. If you were a little pigeon, you could fly to Dollywood in 6 or 7 miles. (It’s a lot farther if you drive because mountains.)

Plus, the Dragon is fairly close by. You could get there in less than 2 hours on a scenic car drive, or you could get there in about 1 terrifying hour on the back of my motorcycle.

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Horrible neighbor of the week

The question for our Real Estate Adviser is short: “Do I have to accept an offer for my home from a registered sex offender?”

The Real Estate Adviser’s answer pivots on whether registered sex offenders are considered to be disabled under the Fair Housing Act. Are they? You’ll have to read the column to find out.