Small loans are a pain point amid the pandemic: NY Fed panel
Evictions and foreclosures are on hold and government assistance has bolstered mortgage and rental payments, but researchers are warning of potential problems down the road, which could be concentrated in smaller mortgages.
“What we are likely to see when these things expire is a massive amount of rent owed,” Matt Murphy, executive director, NYU Furman Center, said during a virtual event hosted by the Federal Reserve Bank of New York on Tuesday. Early indications suggest it will be far larger than the typical $3,000 to $4,000 due in an eviction filing, he said.
The distress is likely to be concentrated in properties with fewer tenants because in a one-to-four unit building, for example, a single incident of distress can mean a significant decrease in rental income. That could deter lenders from underwriting such properties, Murphy said. Regionally, one-quarter of renters are in these smaller buildings, and many of those properties are in predominantly Black or Hispanic neighborhoods, he added.
“I do believe there’s more pressure on the smaller operators,” agreed Charles Ostroff, senior vice president and multifamily chief credit officer at Fannie Mae. The government-sponsored enterprise will likely be insulated from this because its lending on rental properties is generally limited to buildings with five or more units, he noted.
The concern around smaller loans in New York is indicative of a larger national problem.
While low-income renters are generally experiencing more distress than homeowners right now, borrowers of limited means living in owner-occupied properties are also experiencing difficulty that can be compounded by concerns associated with less sizable mortgages.
Those who have lower incomes and are more likely to have smaller loans generally have missed more payments so far in the pandemic, according to an Urban Institute analysis of surveys from the Census Bureau and the University of Southern California.
“It ties into the bigger problem that we’ve continued to see in the data which is that [relatively few] homes that are sold at the low-end of the market are financed. Most of those property sales are happening with cash and being bought up in bulk. So the opportunities for lower-income people that could be buying these properties are limited,” said Alanna McCargo, vice president for the Housing Finance Policy Center at the Urban Institute, in a separate interview.
Lenders often deprioritize the origination or refinancing of lower-balance loans due to their relative lack of economies of scale, and that’s a growing concern for lower-income homeowners that may be experiencing additional financing distress due to the pandemic and could otherwise benefit from current, lower rates.
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, recently added a carve-out from an upcoming 50 basis-point refinancing fee for loans with a balance of $125,000 or lower that represents a nod to the concern. Nearly half of these borrowers are at or below 80% of area median income, according to the FHFA.
But questions remain about how often lenders will be willing to refinance small loans at all as they process a deluge of applications.
“Refinancing obviously is kind of a sensitive issue right now, especially in the COVID context, with the adverse market fee and all the challenges involved in being able to refinance, particularly if you are a person of color with a lower credit score potentially, which most people of color tend to have. There’s just a whole host of issues there,” McCargo said. “Personally, it’s a thing that I’ve grappled with in my own life. My mother, who has a very small balance remaining that she is paying 4.5% on could really benefit from a refinancing. She can’t even get a lender to look at it.”