Would it shock you to learn that a regulatory bill enacted in the aftermath of the 2008 financial crisis ended up hurting some of the very households lawmakers were trying to help?

I didn’t think so. By now it should be clear to everyone that even the best of intentions are no guarantee of good outcomes.

The Dodd-Frank bill, enacted by Congress in 2010, made many changes in how financial firms and products are regulated. Craig Richardson, the Truist Distinguished Professor of Economics and director of the Center for the Study of Economic Mobility at Winston-Salem State University, has studied how these changes affected the market for small-dollar homes — that is, single-family units or condos under $100,000 in value.

Despite the recent run-up in property values, you can still find many such homes right here in North Carolina. Some are in rural areas and small towns. Others can be found in older neighborhoods of our urban areas. Not surprisingly, Richardson chose to examine the housing market in the community where he teaches, Forsyth County.

Before 2010, it wasn’t unheard of for prospective buyers to get modest loans to help acquire or renovate such low-dollar properties. But as Richardson pointed out in a recent cover story for Regulation magazine, originations for mortgage loans between $10,000 and $70,000 dropped by 38% over the past decade. Loans between $70,000 and $150,000 fell by 26%, while the volume of high-dollar mortgages went way up.

One reason for these disparate trends in mortgage lending, Richardson speculated, was that the higher regulatory burdens imposed on lenders by Dodd-Frank — more disclosures, more financial-stress tests, more paperwork — made small-dollar loans unattractive to lenders.

If it’s going to cost a certain amount of time and money to issue a compliant loan, it makes more sense for firms to focus on larger loan amounts. Otherwise, even for trustworthy borrowers, there’s just not enough revenue flow over the course of the loan to justify the expense of making it. One effect of fewer loans available for small-dollar homes is that fewer buyers will be in a position to make offers on them, thus reducing what current owners can expect to get from selling them.

Moreover, the community banks that specialize in such small-dollar mortgages will bear a disproportionate amount of the regulatory burden, weakening their competitive position versus larger financial institutions that can spread overhead costs over a larger universe of customers, depositors, and employees.

That’s the theory, anyway. Does it hold up in practice? To test his hypothesis, Richardson and his WSSU colleague Zachary Blizard looked closely at housing prices in Winston-Salem, which is roughly bisected by US Highway 52 running north to south. As of 2022, three-quarters of all houses on the east side of town had assessed values of $100,000 or lower. In the parts of Winston-Salem west of the highway, only 27% of homes were worth $100,000 or less.

In the immediate aftermath of the Great Recession, property values declined for several years across Winston-Salem. Then they rebounded, though the upswing was much larger on the west side than on the east side.

After adjusting for other factors, Richardson and Blizard found that “since 2010, nominal property values in low‐​income East Winston have dropped by over 40% relative to the rest of the county, driven by a measured drop in small‐​dollar loans as well as a wider constriction of economic activity.”

Were there many Americans who needed federal protection from unscrupulous mortgage lenders in 2010? Perhaps — but surely federal agencies and lawmakers could have come up with a better response than squashing the market for small-dollar home lending.

“By uniformly increasing overhead costs across the industry,” Richardson wrote, “Dodd–Frank penalized or eliminated many community lenders who had the most local knowledge and were most likely to issue small mortgages, business loans, and home improvement loans. Not surprisingly, the legislation’s effects have hit lower‐​income communities the hardest — a product of the law of unintended consequences.”

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history.