American banks are losing interest, consumer advocates say, in writing mortgages for inexpensive homes, The Hill reported. Their exodus from the small-mortgage market leaves a patchwork of risky, poorly regulated home-loan alternatives that can propel the most vulnerable buyers into debt or homelessness. Twenty years ago, the median home cost less than $200,000, and banks routinely approved mortgages for half that amount. Today, the median home costs $437,000, and buyers struggle to find banks that will write mortgages for less than $150,000. Instead, many buyers turn to alternative financing, a universe of personal property loans, lease-purchase agreements, land contracts and seller-financed mortgages. Typically, those transactions are both riskier and costlier than a mortgage, and they fall outside the regulatory cocoon that protects homebuyers from fraud and trickery. In the worst cases, borrowers can lose their home and their solvency. “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-Minn.) said. “Too often, these contracts are designed to fail.” Smith spoke on Tuesday at a Senate hearing with the dramatic title, "Exploiting the American Dream: How Abusive Land Contracts Prey on Vulnerable Homebuyers." Buyers stray outside the protective red tape of the mortgage industry for many reasons. They may have low credit scores, or lack the funds for a down payment, or wish to avoid the deep document dive that attends a mortgage application. The purchaser may lack financial literacy. The lender may be a family friend. “My clients tend to have trusted the seller, the people who approached them with a situation that maybe sounded too good to be true,” Elizabeth Goodell, supervising attorney at Mid-Minnesota Legal Aid, said at the Senate hearing.
