Government created mechanisms for destroying the commercial viability of low-end housing

From "How Dodd-Frank Locks Out the Least Affluent Homebuyers" by Virginia Postrel.  The subheading is Careless people wreaking havoc among the most vulnerable. 

The radical progressive wing of the Democratic party in most large cities has in the past 2-5 years taken up the project of densification, disassembling established middle class single family residential neighborhoods, rent subsidies and subsidizing construction of multi-unit buildings.  

These are destructive ideas on many levels even if we agrees that government has created this situation by making it too difficult to build cheaply in big cities, usually from over-restrictive zoning in the wrong areas, policies against gentrification, an overburden of ineffective construction code regulations, etc.  

Postrel is pointing out another set of federal policies which have substantially destroyed the market for low end home mortgages.  It is a deliberate policy to achieve other, somewhat reasonable, objectives but without taking into account the unplanned and unintended negative consequences on the poor and the low end home market.  

“Over the last decade, origination for mortgage loans between $10,000 and $70,000 and between $70,000 and $150,000 has dropped by 38 percent and 26 percent, respectively, while origination for loans exceeding $150,000 rose by a staggering 65 percent,” reports a new study on small-dollar mortgages from the Center for the Study of Economic Mobility at Winston-Salem State University and the Future of Land and Housing program at the New America think tank. The study is scheduled for release on Tuesday

The culprits behind the disappearance of small-dollar mortgages are lending restrictions enacted with good intentions and warped by economic blind spots. Designed to protect borrowers and the financial system, the Dodd-Frank Act regulations passed in the wake of the 2008 financial crisis “increased the fixed costs and the per-loan costs of extending a mortgage,” says the study. The regulation-imposed costs made small-dollar mortgages a lousy proposition for lenders.

Compounding the problem, the Consumer Financial Protection Bureau then limited the fees that lenders could charge as closing costs. For profit-oriented lenders, small-dollar mortgages are no longer worth the trouble. At best, they squeeze out the tiniest of margins. At worst, they don’t even cover the fixed cost of processing the loan.

Recalling that the CFPB was championed but corporate lawyer, Harvard professor, abuser of affirmative action, and supposed champion of the poor, Elizabeth Warren.

Killing off the small-dollar mortgage market has been an economic catastrophe in East Winston and other lower-income, often historically Black and Latino, neighborhoods. Would-be homeowners can’t buy and longtime homeowners can’t sell. Despite population growth, the inflation-adjusted value of a house in East Winston has fallen from about $150,000 in 2007 to just under $64,000 today, using the Zillow Home Value index. (The nadir was $39,825 in 2014.)

Massive amounts of hard-won local wealth have been wiped out. “We calculated that in real terms, every $1,000 invested in property in East Winston in 1996 is now worth $430; by comparison, every $1,000 invested elsewhere in the county is now worth $1,290,” says the study. The low-dollar houses that do sell mostly go to bargain-hunting investors paying cash rather than to would-be owner-occupants.

Eager to rein in mortgage lenders, legislators behind Dodd-Frank didn’t grasp what the law might mean for borrowers who would otherwise qualify for modest loans. Neither did the regulators at the CFPB. Rare is the policy maker who can even imagine a single-family home today selling for five digits.

It can be enraging how all these nominally altruistic chattering class people end up making everything worse for everyone else and then pat themselves on the back for a job nobly done.

Postrel cites The Great Gatsby.

They were careless people, Tom and Daisy—they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made.