Chla Suggests Fha Could Pay Lenders For Small Mortgages Under $100k

The Community Home Lenders of America (CHLA) concluded that the Federal Housing Administration (FHA) could use direct payments to lenders as the primary tool in a forthcoming small-dollar mortgage pilot program, arguing it is the only approach likely to meaningfully increase originations of mortgages below $100,000.

In a comment letter dated July 16 and addressed to acting FHA Commissioner Joseph Gormley, the trade group said lenders generally lose money originating small-balance mortgages because fixed origination costs outweigh the revenue generated from lower loan amounts.

The suggestions address the implementation of Section 105 of the 21st Century ROAD to Housing Act, which authorizes FHA to establish a pilot program aimed at expanding access to mortgages below $100,000. The law gives the agency authority to provide direct payments to loan originators, adjust FHA loan terms and costs, and offer grants to borrowers for expenses such as down payments, closing costs, appraisals and title insurance.

Higher rates of denials

The proposal comes as policymakers continue to examine the shrinking availability of small mortgages despite the continued presence of lower-cost homes in many markets.

An Urban Institute analysis from 2022 found that about 600,000 U.S. homes — 13.1% of all home sales in 2020 — sold for less than $100,000. Yet only about one-third of these homes were purchased with a mortgage, compared with more than 80% of homes selling for at least $100,000.

The report also found that applications for mortgages under $100,000 were significantly more likely to be denied than larger loans, with researchers citing lender economics, fixed origination costs and servicing challenges as contributing factors.

The Urban Institute noted that small-dollar borrowers are often lower-income, first-time or minority homebuyers, and said expanded access would likely require policies that improve the economics of originating smaller loans.

CHLA said its member lenders have concluded that direct payments to lenders are “the most effective — if not the only way” to measurably increase the origination of FHA small-dollar mortgages.

According to the organization, independent mortgage banks originated about 90% of FHA loans in 2025.

Borrower subsidies unlikely to move the needle

CHLA said subsidies for borrowers would help reduce upfront costs but would be unlikely to significantly increase loan volume because FHA’s low down payment requirements already keep borrower contributions relatively small on lower-priced homes.

CHLA also believes that FHA has sufficient financial capacity to support incentive payments. Citing the Department of Housing and Urban Development (HUD)’s fiscal 2027 budget estimates, the group said each FHA Title II mortgage generates a negative credit subsidy of 3.14%, meaning the agency earns more than it expects to pay in losses.

Based on these estimates, CHLA said FHA could provide combined payments to lenders and borrowers totaling as much as 3% of the loan amount while remaining profitable.

The association said direct payments of up to 1.75% of the loan amount could be administered operationally by withholding the upfront FHA mortgage insurance premium that is normally collected and remitted to the agency.

The letter said CHLA did not identify any FHA loan terms or costs that substantially discourage small-dollar lending. It noted that changing underwriting standards could compromise the safety and soundness of the loans.

The group also believes that federal loan originator compensation rules could limit the effectiveness of any lender incentives. Current compensation requirements generally require loan officers employed by lenders to receive the same percentage-based compensation across all loans, preventing employers from paying higher commissions for small-dollar mortgages.

CHLA also pointed to the federal Qualified Mortgage points-and-fees cap as another obstacle to small-dollar FHA lending. It noted that Section 402 of the ROAD to Housing Act directs the Consumer Financial Protection Bureau and FHA to examine the issue.

The trade group said expanded access to small-dollar FHA mortgages is particularly important for borrowers in rural and underserved communities — and for low- and moderate-income homebuyers who purchase lower-priced homes.

This article was written by Sarah Wolak and generated with the assistance of HousingWire Automation, then reviewed by a HousingWire editor before publication.