Pew: Independent lenders ‘critical’ to access of small mortgages

Policymakers need to help both depositories and nonbanks address small mortgage access, nonprofit says
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A new study by Pew Charitable Trusts is highlighting the crucial role that independent mortgage lenders are “critical” to residential financing access, as such companies have surpassed banks as the main providers of loans for homes under $150,000.

Banks and credit unions were once dominant in the market for small mortgages, originating more than two-thirds of such loans in 2004. Today, however, depository institutions originate less than half of sub-$150,000 loans, according to Pew.

A Pew analysis of Home Mortgage Disclosure Act data found that of the 19.7 million purchase mortgages between 2018 and 2022, 62% were originated by independent mortgage companies. Of the 1.5 million small mortgages during that time period, 53% came from independent lenders.

Community banks, large banks and credit unions, in comparison, originated 21%, 15% and 10% of small mortgages, respectively, during the same time frame.

The outsized share of independent company lending in the mortgage market under $150,000 continues the scale-back of banks, particularly small loans, from mortgage lending after the Great Recession. While depositories largely decreased their market hare, independent mortgage companies grew their small mortgage lending business from 62,000 loans per year in 2010 to 264,000 in 2022.

Pew’s research also confirmed that nonbanks originate a larger share of their loans to low- and moderate-income households, as well as to people of color. This is due partly because the lion’s share — some 89% — of Federal Housing Administration (FHA) loans are originated by nonbanks.

Additionally, Pew noted that while independent lenders have stepped in to a market role that has increasingly swung in their favor over the last two decades, there is still a risk that the shift in lending away from depositories may impede the availability of small mortgages over time.

“Data shows that for every 100 loans issued by independent mortgage companies from 2018 to 2022, just six were small mortgages. In contrast, credit unions and community banks issued 12 and 10 small mortgages per 100 originations, respectively. This suggests that for every 100 loans that shifted away from credit unions and community banks and toward independent mortgage companies, between four and six small mortgages were lost,” wrote Adam Staveski, senior associate of Pew’s Housing Policy Initiative, and Tracy Maguze, an officer at the Initiative, on Pew’s website.

Part of this is because in rural communities, where many properties funded by small loans are located, borrowers still often rely on physical branches of financial institutions. Many independent mortgage companies usually have business models that are Internet-based, making access a challenge for many rural borrowers.

Staveski and Maguze suggest that policymakers need to address such gaps to help depositories and nonbanks alike better reach borrowers who may need small mortgages.

“There’s no one-size-fits-all approach when it comes to increasing small mortgages across the market, but a combination of policies focused on reducing costs for independent mortgage companies and expanding the capacity of banks and credit unions in rural areas would go a long way in helping to ensure that all Americans have access to safe and affordable mortgage financing,” the two said.


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