Banks Are Abandoning Small Mortgages, Pushing Customers To Risky, Poorly Regulated Alternatives

American banks are abandoning the small-mortgage market, leaving customers to navigate risky home loan alternatives that could leave them homeless or in significant debt.

The Hill reports banks are losing interest in writing mortgages for inexpensive homes. In 2003, the average home cost less than $200,000, and banks regularly approved mortgages for $100,000. Today, the average home costs $437,000 and homebuyers are having a hard time finding a bank that will write a mortgage for less than $150,000.

That has forced homebuyers to find alternative financing through property loans, lease purchase agreements, land contracts, and seller-financed mortgages. These alternative methods typically are more expensive than a traditional mortgage and don’t come with the same regulatory protections.

These financing methods can leave homebuyers vulnerable to fraud and tricks that can result in buyers losing their homes and their money. Many people use alternative methods to purchase homes due to low credit scores or to circumvent a down payment.

“People think that they are on the path to owning their own home, when in fact they are on a path to financial disaster, forfeiting all of the money that they have paid in, as well as the place that they thought was their home,” Sen. Tina Smith (D-MN.) told The Hill. “Too often, these contracts are designed to fail.”

According to the Financial Times, banks have benefited from higher interest rates throughout the pandemic. However, three years of relatively low defaults due to pandemic-era stimulus payments is starting to change and banks are feeling the brunt of the coronavirus pandemic.

The Times reports the six largest U.S. banks, JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, and Goldman Sachs, are predicted to write off $5 billion in defaulted loans for the second quarter of this year.

That hasn’t stopped consumer advocates from pointing the finger at the banks, saying they’re growing reluctant to approve loans in the $100,000 range because they don’t turn a significant profit. Additionally, each mortgage a bank approves now costs the banks more money than in previous years.

The abandonment of small loans is mostly affecting homebuyers in the Midwest as opposed to New York and California where the streets are littered with million-dollar homes. It’s also affecting minority home buyers who typically can’t put down as much for a down payment and have lower credit scores.

Commercial real estate loans are also hurting banks as the work-from-home revolution in large cities such as Los Angeles shows no signs of slowing down despite cities and employers desperately pushing to get workers back in the office.