I read something from Realtor.com Research that really caught my attention and I wanted to walk you through it because it affects a lot of folks I talk to in the Bay Area. Basically, the share of mortgages being written for smaller loan amounts has dropped dramatically over the past decade. Back in 2013 and 2014, mortgages under $100,000 made up over 12 percent of all home loans originated. Fast forward to today, and they're less than 3 percent of the market. That's a pretty significant contraction, and the root cause is twofold. Part of it is obvious—home prices have climbed so much that fewer borrowers need smaller mortgages. But here's what's interesting: the decline in small mortgages has actually outpaced the decline in affordable home sales, suggesting that structural barriers are also playing a big role.
Congress recognized this problem and passed the 21st Century ROAD to Housing Act earlier this year to try to fix it. The law takes several approaches. The Department of Housing and Urban Development is running a pilot program that would directly pay lenders to offset their costs on small mortgages, adjust loan terms, and help cover closing costs. Meanwhile, the Consumer Financial Protection Bureau is being asked to study how fee caps and compensation structures for loan officers might be making small mortgages harder to offer profitably. There's also work being done to streamline appraisals, which eat up a disproportionate amount of time and money on smaller loans because the fixed costs don't scale down.
One thing that struck me from the data is that small mortgage borrowers are actually just as creditworthy as typical homebuyers—they have similar credit scores on average. Yet they consistently get charged higher interest rates, even when they're buying homes to live in rather than to invest. That tells you right there that lenders view these loans as a hassle, not a real business opportunity. Small mortgages account for only about 2 to 3 percent of originations in urban and suburban areas, but they're much more common in rural communities where they make up nearly 8 percent of mortgages. Interestingly, small mortgages are also more likely to be for investment properties like fix-and-flips than mortgages generally are.
What I'm seeing locally here in the Bay Area and out in Fremont and the broader East Bay is that these issues hit hardest in neighborhoods where homes are still more affordable. While our market doesn't see as many loans under $100,000 as rural parts of the country, the friction that Congress is trying to address affects anyone trying to finance a lower-priced property. When lenders are less willing to write these loans, it makes it tougher for first-time buyers and investors to get financing, and it can actually limit how many affordable properties change hands. The good news is that policymakers are paying attention to this gap now, and if these new programs work, it could open up more opportunities for buyers who need smaller mortgages.
