It's Getting Harder to Secure a Small Mortgage

Summary

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WSJ Your Money Briefing: "It's Getting Harder to Secure a Small Mortgage"

Date: May 10, 2019
Host: J.R. Whalen
Guest: Ben Isen, Wall Street Journal Reporter

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Episode Overview

In this episode, J.R. Whalen discusses with Ben Isen why securing a mortgage for lower-priced homes—those under approximately $70,000—is becoming increasingly difficult in the U.S. The conversation delves into the financial logic behind banks’ reluctance, the impact on low- and middle-income buyers (especially in affordable housing markets), and alternative methods some buyers are forced to use. This episode is particularly relevant for listeners interested in personal finance, homeownership challenges, and the realities of the current mortgage market for less expensive properties.

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Key Discussion Points & Insights

1. The Vanishing Small Mortgage (03:05)

• Sharp Decline in Loans:
  Ben Isen explains that mortgages with balances between $10,000 and $70,000 have dropped sharply over the past decade because they aren’t profitable for banks.

  "Yeah, it's very difficult to make a profit on a mortgage when it is less than $70,000 or so...They've been rejected by banks simply because of the size of the mortgage." — Ben Isen [03:05]

• Fixed Origination Costs:
  The costs associated with originating and complying with these loans are largely fixed, but the return is much less on small loans.

2. Who Is Affected? (03:39)

• Low- and Middle-Income, First-Time Buyers:
  The hardest hit are potential homeowners in affordable areas—Midwest, South, and rural regions—where property prices are often under $70,000.

  "This affects people in places where housing prices are otherwise very affordable... So the home itself is very affordable, but then you can't get the mortgage and that makes homeownership very difficult or impossible." — Ben Isen [03:46]

• First-Time Buyers:
  The market is especially tough for those looking for an entry-level home or to move up from renting.

3. Stagnant Value of Lower-Priced Homes (04:22)

• Slower Recovery:
  Homes under $70,000 did not appreciate the way more expensive properties did after the housing crash. Many are still valued at or below their 2009 prices.

  "They really dropped off a lot in value after the financial crisis...but they recovered slower." — Ben Isen [04:33]

4. The $50,000–$75,000 Mortgage Threshold (04:58)

• Bank Approval Cutoff:
  Loans below this range are routinely rejected because they’re considered unprofitable.

  "They often say that that's sort of the cutoff where it becomes unprofitable to make a mortgage." — Ben Isen [05:07]

• Role of Small Banks:
  Some community and local banks still offer these loans, as they may better understand local real estate needs.

• Advice to Buyers:
  Housing advocates direct buyers to smaller or regional banks, not large national institutions.

  "I talked to one housing advocate in Youngstown, Ohio, who said when people come to me, I tell them not to go to a big bank...directs them to a local or regional bank." — Ben Isen [05:46]

5. Alternative: Contracts for Deed (06:07)

• Definition & Risks:
  A contract for deed is seller-financing where buyers pay the seller over several years but don’t own the home outright until all payments are made (sometimes with a final 'balloon payment').

  "It's kind of like a hybrid between renting and owning...you don't necessarily have all the rights of ownership until you pay off the contract in full." — Ben Isen [06:13]

• Downside for Buyers:
  Buyers risk losing their investment if they can’t make payments, as foreclosure or eviction is easier than with a traditional mortgage.

6. Credit Issues & Technicalities (07:02)

• More Barriers:
  Applicants for small loans often have credit blemishes or unique financial situations that mainstream lenders are less willing to accommodate.

  "Some people who are seeking smaller loans do have certain credit issues...one buyer...was rejected because he had a lease on a property that was large relative to his income...it was a technicality and I got denied." — Ben Isen [07:11]

7. Banks Prioritize Larger Loans (07:55)

• Focus on Jumbo Loans:
  Banks aggressively compete to approve large (“jumbo”) loans, where profits are higher.

  "Banks have heated competition in this space and they trip over themselves to make loans to these higher income large home buyers." — Ben Isen [08:02]

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Memorable Quotes

• On profitability and small mortgages:
  "It's very difficult to make a profit on a mortgage when it is less than $70,000 or so." — Ben Isen [03:05]

• On the irony of affordable homes being out of reach:
  "The home itself is very affordable, but then you can't get the mortgage and that makes homeownership very difficult or impossible for some people." — Ben Isen [03:46]

• On contract for deed risks:
  "It's kind of like a hybrid between renting and owning, where you have sort of the payments of homeownership...but you don't necessarily have all the rights of ownership until you pay off the contract in full." — Ben Isen [06:13]

• On big banks ignoring technicalities for larger borrowers:
  "None of the big banks went to bat for me, it was a technicality and I got denied just because of this technicality here." — Homebuyer (via Ben Isen) [07:11]

• On the mortgage market’s priorities:
  "Banks have heated competition in this space and they trip over themselves to make loans to these higher income large home buyers." — Ben Isen [08:02]

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Notable Timestamps

• 03:05: Why small mortgages aren’t profitable for banks
• 03:46: Regional impacts and examples of affected buyers
• 04:33: The stagnant value of homes under $70,000
• 05:07: The practical cutoff for loans banks will consider
• 05:46: Advice to buyers (go local/small bank)
• 06:13: What is a contract for deed and its pitfalls
• 07:11: Credit issues and how they affect small mortgage approvals
• 08:02: How much more energetic banks are when offering large (jumbo) loans

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Summary by:
WSJ Your Money Briefing Podcast Summarizer
For more financial insights and personal finance guidance, tune in to the full episode.

Transcript

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[J.R. Whalen]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. How small is too small when applying for a mortgage? We'll run some numbers in a moment. First, these money and market stories. You should know hourly wages are going to continue to move higher the next year. That's the feeling of economic forecasters surveyed by the Wall Street Journal. And they feel the wage growth will be spurred by worker scarcity. Year over year growth and average hourly earnings has been above 3% every month since August after languishing for nine straight years. And while US paychecks have risen, inflation has remained in check and that leaves more money in workers pockets. But the price of the gas pump might feel like it's burning a hole in your wallet. The good news is relief is on the way. The folks at Gas Buddies say while the price of gas has risen an average of 67 cents per gallon and since the start of the year, prices are about to come down as summer supplies rise. But the price drop will be especially noticeable on the west coast where a series of unexpected refinery outages that drove prices upward has subsided. And it's pretty common to find free Wi Fi in coffee shops and restaurants and hotels. But airlines are a significant holdout. Well now Delta is going to carry out a two week test of free Wi Fi on about a dozen domestic flights later this month. Currently it costs as much as $16 to connect to the in flight Internet on Delta for a day for passengers flying in North America and $28 for a day on international flights. The biggest problem that typically affects in flight Internet service is service outages, even though many planes are now outfitted with high speed satellite service that can handle larger passenger volumes. But the high price tag has often been a deterrent, keeping usage rates relatively low. So far, JetBlue is the only US airline that offers free Internet for which it subsidizes with corporate sponsorship. People are getting priced out of the mortgage market. And no, it's not people looking for a big house or a mansion. It's low and middle income prospective home buyers seeking small mortgages like in the under $100,000 range. And wall Street Journal reporter Ben Ison is here with some details. So Ben, the number of mortgages with balances between $10,000 and $70,000 approved by banks has really dropped steeply in the last 10 years. Has a lot to do with them not being cost effective for banks.

[Ben Isen]

Yeah, it's very difficult to make a profit on a mortgage when it is less than $70,000 or so. Some, some buyers say that they've been rejected by banks simply because of the size of the mortgage. And the reason it's so difficult to make a profit on a mor, the banks have sort of a fixed cost to originate it and compliance and all of that. But the amount of money that they make on the loan grows with the size of the loan. So if you think about a small loan, your margins really compress or become non existent when you're trying to make a loan of that size.

[J.R. Whalen]

And this really impacts low and middle income consumers. But I also imagine it would impact people looking to buy their first home as well.

[Ben Isen]

Definitely. And when reporting out this story, one thing we really found was that this affects people in places where housing prices are otherwise very affordable. This is places in the Midwest, near cities like St. Louis and Chicago, Youngstown, Ohio and also in the south, around Atlanta and El Paso and also in more rural areas. So the home itself is very affordable, but then you can't get the mortgage and that makes homeownership very difficult or impossible for some people.

[J.R. Whalen]

So the consumer has it's within their reach, but they can't get the bank to put together a package for them.

[Ben Isen]

Exactly.

[J.R. Whalen]

The other issue here, and this is illustrated in your Journal story, is that lower priced homes have really not appreciated in value like higher priced homes have since the housing market recovered.

[Ben Isen]

Yeah, this is sort of like the very low end of the price range. When you look at homes under $70,000, they really dropped off a lot in value after the financial crisis along with the rest of the housing market. But they kind of bott and they recovered slower. You've seen that a lot of homes in this range that were under $70,000 in 2009 are still under $70,000.

[J.R. Whalen]

It seems like the $50,000 to $75,000 range is the threshold here. And above that is where banks are more likely to approve a mortgage.

[Ben Isen]

Right. That's what, when you talk to buyers, they're often told by their lenders that they can't get loans for less than that size. When you talk to lenders, they often say that that's sort of the cutoff where it becomes unprofitable to make a mortgage. That said, it's not all lenders. There are lenders who do make loans of this size. And when you think about who does it, it's often sort of the smaller community or local banks that might have sort of a better sense of local real estate dynamics.

[J.R. Whalen]

That was my next question, is that you have to kind of look beyond the big banks and see if there are smaller banks that can, I guess, make money more often in smaller increments and go after the smaller mortgages.

[Ben Isen]

Right, right, definitely. Or also kind of adjust the costs associated with originating the mortgage. I talked to one housing advocate in Youngstown, Ohio, who said when people come to me, I tell them not to go to a big bank, and she directs them to a local or regional bank that is really able to do that kind of loan.

[J.R. Whalen]

But for the lower income buyers, they wind up having to be in contracts for deed. Can you explain what that is?

[Ben Isen]

Sure. It's not like everyone who doesn't get a mortgage ends up in a contract for deed, but it is sort of one of the more popular forms of alternative financing that we've seen out there. And this is sort of a seller financing vehicle where the buyer will go to the seller to buy a house and the seller will say, I will finance the sale over a number of years, three, four, five years, and maybe there's a balloon payment at the end, but it often is not beneficial to the actual buyer because you often. It's kind of like a hybrid between renting and owning, where you have sort of the payments of homeownership, a down payment and monthly payments. But you don't necessarily have all the rights of home ownership until you pay off the contract in full. So if you miss payments, it's easier to foreclose or evict the tenant.

[J.R. Whalen]

Oh, I see.

[Ben Isen]

All right.

[J.R. Whalen]

And then lenders, you point out in your story, are less likely to help people seeking small loans who might have credit issues that could complicate things.

[Ben Isen]

Yeah, I think one thing that you see in this corner of the mortgage market is that some people who are seeking smaller loans do have certain credit issues, whether it's a bankruptcy in the past or a low credit score, or if it's just sort of a technicality. One buyer who was looking to get a small loan told me that he was rejected from banks because he had a lease on a property that was large relative to his income, but he split it with three renters. So it was kind of a technicality that his kind of debt to income ratio was so high, which is what kind of made him unable to get a loan. And he said none of the big banks went to bat. For me, it was a technicality and I got denied just because of this technicality here.

[J.R. Whalen]

The banks might go to bat for somebody looking for a larger mortgage with more principal and interest in the game for the bank.

[Ben Isen]

There's definitely more money on the line for a larger loan. What you see if you go to the other end of the spectrum for the mortgage market, jumbo loans, big loans, too big to sell to Fannie Mae or Freddie Mac. Banks have heated competition in this space and they trip over themselves to make loans to these higher income large home buyers. In that sense, they're a bit more willing to be a bit more dynamic, it seems like.

[J.R. Whalen]

All right, that's Wall Street Journal reporter Ben Isen here in our studio. Ben, thanks for coming on the show and explaining all this to us.

[Ben Isen]

Thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Deel Advertiser]

Still running global payroll like a relay race, Deal replaces fragmented payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday, SAP, Netsuite operate like a local everywhere. Visit deel.com WSJ that's deel.com WSJ.