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Financial Services Law Insights and Observations

FHA seeks to increase small balance mortgages

Agency Rule-Making & Guidance Federal Issues HUD FHA Mortgages Consumer Finance Mortgage Origination

Agency Rule-Making & Guidance

On October 4, FHA announced a request for information (RFI) seeking input on ways to facilitate greater origination of small balance mortgages for FHA insurance. FHA will use feedback received in response to the RFI to help identify barriers to the origination of small mortgages in its program. The agency will also consider the development of policies and programs to better support and expand affordable homeownership opportunities in underserved markets with lower housing prices and to close the racial homeownership gap. According to the announcement, the RFI seeks input on topics related to “the current availability of small mortgage financing, barriers and disincentives to small mortgage lending transactions, changes to policies or processes that would encourage origination of more FHA-insured small balance mortgages, and considerations regarding liquidity provided through securitization.” Comments on the RFI are due December 5.

In conjunction with the RFI, HUD released a report assessing factors that limit the supply of small mortgage loans and highlighting challenges facing borrowers who need loans to purchase lower-priced homes. The report, titled Financing Lower-Priced Homes: Small Mortgage Loans, found that mortgage loans having an original principal obligation of $70,000 or less represent less than 3.5 percent of originations in 2020. Many of these loans secure properties valued at more than $70,000—an indication that the purchases included substantial down payments, HUD said. Among other things, the report also found that FHA disproportionately insures loans for lower-priced homes compared to the rest of the mortgage market and has loan insurance programs for financing property improvements and manufactured homes that are particularly targeted to lower loan amounts. Additionally, the report flagged the fixed costs of loan origination and servicing as a significant barrier to small mortgage lending, noting that this makes small mortgage loans less profitable and may necessitate additional incentives for lenders, such as reducing costs or providing additional lender or loan originator compensation.