Dayton has cheaper homes on market but fewer loans for them

Experts blame tight credit and low profitability of loans for less expensive housing.

Lenders are issuing very few loans for lower-priced housing despite growing local demand for them, according to researchers and experts.

Obtaining mortgage loans for less than $50,000 has always been difficult, but it’s even harder in recent years, partly because of tight credit and low profitability of the loans, according to the Urban Institute’s research.

“Moderate- to low-income people, especially in neighborhoods of color, are being starved for access to credit,” said Jim McCarthy, president and CEO of the Miami Valley Fair Housing Center.

Zillow estimates the median home value in Dayton is $48,600, and the share of lower-valued housing stock has risen across the region.

But traditional financial institutions have not increased small lending to meet the demand, according to Urban Institute research.

“There are more homes in that price range, but there are not as many loans in the price range,” said Bing Bai, research associate with the Urban Institute.

Some advocacy groups said banks should do more to offer and market loans that benefit poor and working-class residents.

Loans in that range represented about 5.2 percent of owner-occupied mortgage loans issued by banks in the Dayton metro area in 2014, according to the research. That’s down from 7.1 percent in 2011.

However, during that time frame, the share of homes that are worth $50,000 or less in the region has climbed by more than 2 percentage points to 9.85 percent, the data show.

And Dayton’s housing stock is less expensive than the region’s.

The applicants for small loans are being denied more frequently, the research found.

Lenders likely are less willing to originate small loans because they have limited lending capacity and tend to prioritize loans that provide higher margins, said Aaron Terrazas, a senior economist at Zillow.

“They want more bang for the buck,” he said.

Mortgage loan originators make commission on loans.

Originating a mortgage for a low amount requires the same amount of work and time commitment as a larger loan, but the financial reward can be negligible, according to officials with the HomeOwnership Center of Greater Dayton.

Some lending institutions are not making small loans due to certain regulations, such as the qualified mortgage rule and points and fees cap, officials said.

Dayton's housing market is the third most affordable major housing market nationally, according to the National Association of Home Builders.

But the cheap prices of homes doesn’t mean much if people can’t get the financing needed to buy them, according to advocates for affordable housing.

Advocates believe that many would-be homebuyers in Dayton and similar low-cost markets are being sidelined because they can’t access credit.

This has consequences because homeownership is an effective way for people to accumulate wealth, research suggests.

“Using a mortgage to buy a home is a very solid, proven way to build financial stability and build your assets,” said Sheryl Pardo, the associate director of communications in the Housing Finance Policy Center at the Urban Institute.

Paying down the principal of a mortgage builds equity and is a form of savings. Homes also generally tend to appreciate over time.

Some people may be able to turn credit unions and mission-oriented community development groups to get a loan for a real estate purchase, Bai said.

Local officials said Wright-Patt Credit Union (WPCU), Fifth Third Bank and Wesbanco are among the financial institutions in the region that offer smaller loans and try to support under-served markets.

In 2015, WPCU helped nearly 1,600 consumers purchase a home, and about 8 percent were for homes in which the loan amount was $50,000 of less, said Tim Mislansky, senior vice president and chief lending officer for WPCU.

“WPCU has no limit on the low-end regarding a mortgage loan,” he said. “We understand the challenges and opportunities residents in the area experience.”

However, some people may resort to using more risky financial alternatives, such as land contracts, which are similar to layaway plans and can result in people being evicted or losing all the money they put toward purchase if they miss even a single payment, Bai said.

Meanwhile, the lack of small mortgages means low-cost homes are more likely to be purchased by investors, who can pay in cash and are looking to profit from rental income, advocates said.

People who live in the homes they own tend to be more willing to invest in the properties than people who rent them out, they said.

“Ideally, neighborhoods have a good mix of rental properties and owner-occupied properties,” said McCarthy, with the fair housing center.

McCarthy said retail lenders can profit from smaller loans, and offering them is the right thing to do.

Banks have a social obligation to offer basic financial services to everyone, including people on the lower end of the income spectrum who cannot afford or do not want more expensive properties, he said.

“I would describe it as a market failure not to meet the demand for these loans,” he said.

Greg Lockard, lending manager with the HomeOwnserhip Center of Greater Dayton, said most financial institutions will work on meeting their customers’ needs, including low-value mortgage loans.

He said it would not be smart for banks to open branches in low- to moderate-income areas and collect deposits but then fail to meet the demand for lending.

Huntington Bancshares has announced a community development plan that will begin in 2017 will include mortgage and small business lending in low- and moderate-income communities, according to the Dayton Human Relations Council.

Terrazas, with Zillow, also said financing purchases of low-cost homes can be achieved through other avenues, including borrowing from family members or their 401(k) accounts or occasionally using their credit cards.

He said the small loans issue is fairly insignificant compared to some other concerning trends in the home mortgage market, including the struggles people have coming up with down payments.

“In the broad scope of issues that our housing market is facing, I think the difficulty of obtaining low-dollar mortgages is pretty minor,” he said.