New Research Project to Explore the World of Small Home Loans

The Pew Charitable Trusts has launched a project focused on the lack of affordable small mortgages and how that may be steering borrowers to alternative arrangements that have higher costs and greater risks.

This interview with project director Nick Bourke has been edited for clarity and length.

When we talk about a lack of small mortgages—such as to finance properties priced at less than $150,000—what are we talking about?

The Pew Charitable Trusts

The availability of mortgages that are suitable for homes in this price range has been on the decline since the early 2000s, to the point where it’s become way out of proportion to the number of these homes on the market. It’s not necessarily the case that potential borrowers lack adequate credit; many have credit profiles that are comparable to people who are looking for larger loans. That suggests that the problem is the dearth of small mortgages. So we want to take a deeper look into availability and supply to find out why more small mortgages aren’t being made.

If people buying these homes can’t find a small mortgage, what can they do?

The lack of small mortgage availability leads some borrowers toward other forms of financing— products such as lease-purchase or land contracts—which are often riskier and higher cost. These arrangements differ from mortgages in many ways, and we don’t know a lot about the prevalence and outcomes of these arrangements. That’s why Pew decided to research this segment of the market.

Talk a little about how these other forms of financing actually work.

Nonmortgage alternative financing comes in several varieties. One major type is land contracts, in which the seller is also the lender and receives regular payments from the buyer to purchase the home. But there are several important differences compared with mortgage loans. For one, the seller doesn’t always do a title check, so there could be other mortgages or liens on the property that could come back to haunt the buyer. Other times, the seller doesn’t transfer the deed at the time the agreement is signed. These arrangements can carry a lot of risk for would-be buyers because they don’t actually get clear and certain equity or rights to the home until they make the final payment.

Other types of alternative arrangements include lease-purchase agreements, also known as rent-to-own or lease with option to buy. As the name implies, these contracts typically give renters an option to become owners of the home after a predetermined period of time if they meet certain obligations. Often, a portion of rent is reserved to be a down payment on a later purchase. But if the buyer isn’t able to finalize the purchase, all equity could be lost, or they could even be evicted.

You said that these arrangements are often riskier and more expensive than a mortgage. How so?

They are riskier and more expensive in a number of ways. Interest rates on these alternative financing arrangements can be as high as 20%, compared with about 4% on a traditional mortgage. Sellers sometimes charge large down payments and upfront fees, and they often require borrowers to pay for costly repairs needed to make the home habitable. Sometimes, sellers evict those who fall behind on their payments, which causes buyers to lose any equity they have accumulated. Basically, occupants have the responsibilities of homeownership but not the benefits.

But aren’t there protections for borrowers in these situations?

A range of government protections apply to traditional mortgages—truth-in-lending requirements, foreclosure safeguards, and the like—that don’t usually apply to these alternative arrangements. Take moratoriums on foreclosures, for instance: In the pandemic we saw them approved for traditional mortgages, but they didn’t usually extend to nonmortgage arrangements. In a similar vein, you have a law like the Community Reinvestment Act, or CRA, which incentivizes banks to make mortgage and other loans to people in low-income areas. But the current CRA rules don’t cover manufactured housing—what most people call mobile homes—an omission we’ve asked the Federal Reserve Board to rectify.

All this means we currently have a situation where alternative home financing can land a buyer in serious legal difficulty or mired in debt, possibly leading to thousands in fees, interest, and other costs that can contribute to buyers paying way more than their homes are worth.

That’s not to say that everything is necessarily negative when it comes to mortgage alternatives. There are some potentially innovative, affordable models. But we haven’t studied them enough to know about their outcomes, and we haven’t studied the market enough to understand the risks and costs.

Can you say more about the role of manufactured, or mobile, homes?

Manufactured homes are the biggest source of unsubsidized, low-cost housing in the United States. That makes them an important source of housing for low- and moderate-income families. Although some buyers use a mortgage for manufactured homes, 
they are often purchased using either personal property loans, which are more like car loans, or rent-to-own arrangements.

These personal property loans often lack the protections that mortgages have, and that makes it easier for borrowers to end up with a harmful loan—and leaves them more vulnerable to quicker repossession compared with those who finance with a mortgage.

How big a market are we talking about?

Millions of homebuyers have used rent-to-own or other alternative financing arrangements—exactly how many is not yet known, but it is something our researchers are investigating. What we do know is that nearly 22 million people live in manufactured housing in the U.S. today, and in some counties, especially in the South and West, these homes make up more than a third of the housing stock, which is a bigger segment of the nation’s housing market than some may realize.

With that background, how is Pew’s project approaching its research?

Our research on how Americans finance the purchase of a home essentially falls into three big buckets. One is understanding the issue through a consumer lens: What hurdles are people facing when trying to obtain financing, or later in the process as they navigate these arrangements? We’re getting at this through a variety of means: surveys, focus groups, and in-depth interviews.

The second bucket is looking at the issue from a legislative and state law angle. Policy approaches vary by state, so we’re cataloging and evaluating the particulars of laws in individual states and tracking recent legislation. That should be helpful not only to us but also to policymakers looking to compare their policies with those of other states or jurisdictions.

In the third bucket, we’re analyzing available data sets to look at mortgages, borrower demographics, loan terms, and related factors to get a sense of where problems may be concentrated. We need to do more work to address the disparate outcomes in homeownership across race, income, and other demographics, and part of that is understanding the options people have when they begin their homeownership journey. Not much is known here, so there’s a lot to learn.

You mentioned looking at all this at the state level. From a policy standpoint, is this a state-level issue, a federal issue, or both?

It’s both. Federal housing regulators such as the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation all play important roles to ensure that creditworthy Americans have access to safe and affordable home loans. Care must be taken so that policies complement one another and are not working at cross-purposes. It’s also going to be important to reexamine how manufactured housing fits into federal lawmakers’ affordable housing and home lending agendas. For example, the Federal Housing Finance Agency could do more to promote access to safe, affordable loans for manufactured housing. Bank regulators could strengthen CRA regulations for that purpose too, and for making it easier to get a small mortgage loan.

The states have a large role to play to ensure strong consumer protections for borrowers who use alternative financing arrangements. As I’ve said, we don’t know a great deal about how extensive these issues are, or about the outcomes of the people who use these loans. That’s where Pew sees our role. Just as we’ve done with our consumer finance project, we can create a fact base that will help policymakers better understand borrowers’ experiences, potential harms, and outcomes. Hopefully, this will help legislators and regulators as they formulate and weigh policy options, potentially leading to effective solutions they may not have otherwise considered.

How would you summarize the importance of this issue?

For people across this country, especially those with low and moderate incomes, homeownership plays a big part in family economic stability. Families should be able to safely and successfully navigate the road to homeownership. They should be able to rely on safe and affordable financing arrangements to get there.

So that raises a couple of questions. Are there ways for alternative home financing to translate into the goal of homeownership and make families more economically stable? Can better policies or business practices connect more creditworthy borrowers to mortgage loans that help them purchase affordable homes? That’s what we intend to find out.

This article was previously published on pewtrusts.org and appears in this issue of Trust Magazine.