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Financing Lower-Priced Homes: Small Mortgage Loans
The House of Representatives Committee Report, 116–452, accompanying the Departments of
Transportation, and Housing and Urban Development, and Related Agencies Appropriations Bill, 2021,
requests that the U.S. Department of Housing and Urban Development (HUD) review the Federal
Housing Administration’s (FHA’s) single-family mortgage insurance policies, practices, and products to
(1) identify barriers or impediments to supporting, facilitating, and making available mortgage insurance
for mortgage loans having an original principal obligation of $70,000 or less, (2) identify administrative
actions that HUD could take to remove barriers and impediments, and (3) describe the effect of such
actions on the solvency of the Mutual Mortgage Insurance Fund (MMI Fund).
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This report is submitted in
response to that request.
Mortgage loans with an original principal obligation of $70,000 or less are a small portion of the
mortgage lending market, constituting less than 3.5 percent of home purchase originations in 2020.
Many of these low balance mortgage loans secure properties valued at more than $70,000; only 57
percent of small mortgage loan originations are for owner-occupied, lower-priced homes. Lower-priced
homes constitute a disproportionate share of the housing stock in rural areas of the Southeast, older
industrial areas in the Midwest, and urban areas throughout the South. Manufactured homes comprise
28 percent of homes valued under $100,000. Many of these homes are placed on land not owned by the
homeowner, which makes these homes personal property and not eligible for a traditional mortgage
loan.
FHA programs do not impose minimum loan amounts, nor do FHA’s policies intentionally discriminate
against small mortgage loans. FHA insurance exists for the explicit purpose of incentivizing lenders to
make loans they otherwise would not, to provide access to homeownership for qualified homebuyers in
communities throughout the country. FHA disproportionately insures loans for lower-priced homes
compared to the rest of the mortgage market. The report discusses FHA underwriting of small mortgage
loans and programs for financing property improvements and manufactured homes that are particularly
targeted to lower loan amounts.
A significant barrier to small mortgage lending is the fixed costs of loan origination and servicing, which
makes smaller loans less profitable to lenders, particularly given that mortgage loans on lower-priced
homes are associated with higher delinquency rates and a greater loss severity rate. Because limited
profitability appears to be a primary driver of low origination volume of small mortgage loans to owner-
occupant purchasers of lower-priced homes, increasing the number of these loans submitted for FHA
insurance endorsement may require either a reduction in origination and servicing costs or the provision
of additional lender or loan originator compensation sufficient to make small mortgage loans profitable
at levels acceptable to lenders. More information about how costs and regulatory limitations are
preventing lenders from making these loans will be required to develop a proposal for how these goals
might be achieved.
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See House of Representatives Report 116–452, 134, https://www.congress.gov/116/crpt/hrpt452/CRPT-
116hrpt452.pdf.