Providing small mortgage loans at non-subsidized prices affordable to the borrower has always been a challenge. The core problem is that the high cost of originating and servicing a mortgage loan is no smaller for a small loan than for a large one, but the dollar amounts of interest and origination fees received by the lender are smaller on small loans. The obvious remedy, charging a higher interest rate or upfront fees on smaller loans, may make it unaffordable, may be interpreted as “price-gouging”, and may invite the attention of regulators.

Home mortgage lenders prefer to avoid these problems by setting minimum loan amounts, which today are generally in the range of $50,000 to $75,000. Below $50,000, mortgage loans are generally not available. This is a problem for isolated communities in which home prices are very low, and also for borrowers anywhere who are looking to refinance small loan balances.

The Problem of the Small Isolated Town

“In my town, we need mortgage loans from $5,000 to $30,000, and they just arent available. Is there anything that can be done?”

The town is Winters, Texas, population about 3,000. There are few jobs there or anywhere very close, and median household income is about $26,000. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town is so isolated and the demand so small that it cant support a lending facility. There are no appraisers, for example; if one is needed the cost will be double the cost in a larger center because of the time it takes for the appraiser to get to Winters and back. Continue reading →