A Fair and Realistic Solution to Homeownership Inequality
by Jorge Newberry
As I discussed in a recent Huffington Post article, one of the unintended consequences of the 2010 Dodd-Frank Act—which sought to address toxic mortgage lending practices that led to the Great Recession and the ensuing housing collapse—was that it resulted in most national lenders deciding that loans under $100,000 were not worth the hassle, and so they began to move away from financing homes beneath the $100,000 threshold.
The reason? Because Dodd-Frank placed caps on the fees and interest a bank can collect on a mortgage.
The result? Most lenders set minimum loan amounts ranging from $50,000–$100,000, which ended up with America’s most underserved communities having far fewer mortgage options than they already had prior to 2008.
Though Dodd-Frank was designed to protect consumers from subprime mortgages and predatory practices, its effect was that banks simply excluded many potential homeowners looking to buy in America’s most affordable communities. So, the micro-mortgage—as it has come to be known in finance and real estate—is one potential and realistic solution to the problem of inaccessible home financing. Luckily, there have been many small lending operations that have identified this solution, and micro-mortgages have slowly become more common and have opened opportunities for homeownership to larger amounts of people.
With a micro-mortgage, a $25,000 home in your neighborhood can be purchased by you or one of your neighbors, rather than being snapped up by a cash investor who turns it into a rental, leasing it to the same family who had hoped to buy it in the first place. Why does this matter? Because these neighborhoods that used to have civic pride and that were once predominately owner-occupied have shifted to predominantly tenant-occupied. This is problematic for the community. Strong communities are built when people can put down roots and invest both financially and emotionally in their neighborhood, and homeownership is the key to this. Homeowners are far more likely to be positively involved in their communities because they are invested in the long-term more so than renters, who tend to feel more mobile, temporary, and disconnected from the larger concerns of the neighborhood. Major nationwide lenders do have the ability to make micro mortgages, of course, but they rarely, if ever, choose to do so. It is not seen as a cost-effective way of doing business. Even if they do decide to lend below $100,000, which is rare, very few will lend below $50,000.
Another positive aspect of micro mortgages is that they are also able to be paired with government-backed mortgage lending programs. This means that government sponsored enterprises like Fannie Mae and Freddie Mac are working with micro-mortgage lenders to help create more homeowners in the communities that need it most. A major benefit to homebuyers utilizing these programs is that you can often buy a home with as little as 3% down—and, in some cases, even 0% down. CRA loans can be utilized with micro mortgages as well, and often have the option to put down as little as 3%. Other government homebuyer assistance programs—such as FHA, VA, and USDA loans—are also able to be used by homebuyers using micro mortgages.
People often bemoan the inequities baked into American society, particularly regarding homeownership disparities and racial wealth gaps, which are both inextricably bound together. The micro-mortgage is one way to push back against systemic racism in the real estate space. In his blog, social justice writer Aaron Morales has covered the various historical reasons why America’s most vulnerable communities are being locked out of the world of homeownership. He shows how homeownership is a social justice issue at its core. He explains why poor and minority Americans assume we will never be allowed to become homeowners, and therefore, rarely bother taking meaningful steps to achieve homeownership. Morales has even unpacked the many ways predatory lenders are knowingly and purposely bleeding the poorest and most ignored communities for every penny they can, all while leaving behind millions of people drowning in unsustainable debt that haunts them for years. I encourage anyone interested in social justice within the real estate space to pay a visit to his blog and see the enlightening work he has done to dissect the issue of homeownership inequality from a wide variety of angles.
How Micro-Mortgages Work
Other than the lower amount of the loan, there should not be any difference from conventional loans in how a micro-mortgage functions. They are simply for smaller amounts. Interest rates should be the same. Loan terms should be the same. Unfortunately, there are some lenders who, citing the “high-risk” buyers asking for micro- mortgages, raise fees and interest rates to predatory levels. Avoid these lenders at all costs. The process of applying for and obtaining a home loan with a micro-mortgage is also the same:
- Find a real estate agent to represent you and locate a home you wish to purchase.
- Determine your budget for a deposit and monthly payments.
- See which government-backed mortgages you are eligible for and apply.
- Get approval for a loan amount and make your offer.
- Upon acceptance, go through the process of closing on the home.
- Finally, upon closing—or finalizing—the purchase of the home, you have reached the first and most important step on the path of creating wealth for yourself and future generations, not to mention the many other financial and personal benefits that come from owning a home.
The company I founded last year as a social justice initiative to increase American homeownership rates to 75% for all Americans, regardless of race or income, makes micro mortgage loans for as little as $5,000 up to $100,000.
We are also able to make loan lengths up to 30 years, just like a conventional mortgage. Having the option to extend a micro-mortgage for up to 30 years will have an immediate and lasting impact on any buyer’s financial situation.
A Ray of Hope
So why a loan as small as $5,000, up to $100,000? Why a micro-mortgage under the $100,000 national lender threshold? Because there really are places in America where homes are that affordable. Imagine the freedom of being able to buy a home with just a few hundred dollars down, spending so much less than rent, and owning the home instead of watching your monthly housing cost evaporate into thin air. The micro mortgage is the key.
I am hopeful that companies like mine, and micro-mortgages in general, will be a much needed catalyst for change in the fight for homeownership equality. I am hopeful that it will be a ray of hope for the countless poor and minority Americans who have written off the possibility of homeownership in their lifetimes.
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About the Author: Jorge Newberry is the founder of American Homeowner Preservation, AHP Servicing and AHP Mortgage Direct, a national mortgage banker which originates micro mortgages as low as $5,000.