Key facts
- CHLA recommends direct payments to lenders as the primary tool for an FHA small-dollar mortgage pilot program.
- The proposal aims to increase originations of mortgages below $100,000, which are currently unprofitable for many lenders.
- The 21st Century ROAD to Housing Act authorizes the FHA to establish such a pilot program.
- A 2022 Urban Institute analysis showed a significant disparity in mortgage usage for homes under $100,000 compared to those above.
- CHLA believes FHA has the financial capacity to offer these incentives and remain profitable.
The Community Home Lenders of America (CHLA) has formally requested that the Federal Housing Administration (FHA) prioritize direct payments to lenders within its upcoming small-dollar mortgage pilot program. In a letter dated July 16 to acting FHA Commissioner Joseph Gormley, CHLA argued that this approach is essential to significantly increase the origination of mortgages under $100,000.
CHLA's recommendation stems from the observation that lenders often incur losses on small-balance mortgages due to fixed origination costs exceeding the revenue generated from lower loan amounts. The proposed pilot program is authorized by Section 105 of the 21st Century ROAD to Housing Act, which allows the FHA to explore various methods to expand access to these smaller loans.
This initiative comes amid concerns about the declining availability of small mortgages, even in markets with lower-cost homes. A 2022 Urban Institute analysis highlighted that while 13.1% of U.S. homes sold for under $100,000 in 2020, only about a third of these were financed with a mortgage, compared to over 80% for homes priced at $100,000 or more. The same report indicated that applications for mortgages under $100,000 faced higher denial rates, attributed to lender economics and servicing challenges.
CHLA asserts that direct lender payments are the most effective, if not the sole, method to boost small-dollar FHA mortgage originations, noting that independent mortgage banks handle approximately 90% of FHA loans. The trade group also suggested that borrower subsidies, while helpful for upfront costs, would not substantially increase loan volume due to existing low down payment requirements. CHLA pointed to the Department of Housing and Urban Development's fiscal 2027 budget estimates, suggesting the FHA has the financial capacity to offer combined payments to lenders and borrowers up to 3% of the loan amount while remaining profitable.
The association proposed that direct payments of up to 1.75% of the loan amount could be managed by withholding the upfront FHA mortgage insurance premium. CHLA found no specific FHA loan terms or costs that significantly deter small-dollar lending, cautioning against changes to underwriting standards. Additionally, the group highlighted federal loan originator compensation rules and the Qualified Mortgage points-and-fees cap as potential limitations, noting that the ROAD to Housing Act directs the Consumer Financial Protection Bureau and FHA to examine these issues. CHLA emphasized that expanding access to small-dollar FHA mortgages is crucial for borrowers in rural and underserved communities, as well as for low- and moderate-income homebuyers.