A new report by the Federal Reserve Bank of Philadelphia found that not only are there less people receiving these small-dollar mortgages, but applicants for them were denied credit twice as often as applicants for larger loans, despite similar credit profiles.
Community development researcher Kyle DeMaria says credit history was cited on 30% of all small-dollar denials, versus just 19% overall.
“Credit scores are often used to measure one's credit history," DeMaria says. "And we know from past research that credit scores are less predictive of default risk for lower income people and people of color. And one reason that that is true is because these populations may have less credit data in their credit files.”
As a result, small-dollar mortgages saw a 28% decline in originations in Delaware and Pennsylvania, and 43% in New Jersey.
DeMaria says looking for other forms of credit data like on time and consistent rental payments could increase access to mortgages across the board.
Rising housing prices are also a major source of declining small mortgages – $100,000 won’t cut it anymore. High demand and low supply of housing during the pandemic resulted in a 19.3% price hike from 2020-2021.
DeMaria says understanding mortgage lending trends is just one way to work towards supporting affordable homeownership.
“What was interesting as well, in Delaware in particular, was that whereas the small dollar denial rate was about twice that of the overall denial rate in general, we found that black applicants for small dollar mortgages were denied at a rate three times that of black applicants for mortgages overall," he says.
Most small dollar mortgages were taken out by white and low and moderate income borrowers, and banking institutions played a significant role in lending. Banks originated a greater share of small-dollar mortgages (32–46%) than they did mortgages overall (23–33%) in Delaware, Pennsylvania and New Jersey.
