Real Estate Marketing & Beyond
A new report has argued that rent, utilities and telecommunications payment data should be used in mortgage underwriting to improve racial equality and help more people from minorities to become homeowners.
The report by Michael Stegman, a non-resident fellow at the Urban Institute and former senior policy advisor in the Obama-era White House, and Kelly Thompson Cochran, deputy director of FinRegLab, argues that including rental data is a crucial step from a racial equity standpoint. That’s because renters are disproportionately people of color and it is the one bill that’s most analogous to a mortgage payment.
Even so, the authors of the report acknowledge that collecting rental payment data is hard in a nation with 10 million smaller landlords that makeup 44% of the U.S. rental market. They also understand there are numerous obstacles in the way of changing a mortgage underwriting process shaped by multiple stakeholders, including Fannie Mae and Freddie Mac.
“It’s much more complicated to gather that data, rather than utility or telecommunications [data], because both of those markets are more consolidated,” said Thompson Cochran in an interview with HousingWire.
Another challenge lie in standardizing rental payment data, which is something that would require cooperation from the numerous stakeholders, the authors said.
According to Stegman, federal agencies such as the Federal Housing Finance Agency could facilitate a transition by providing funding and clarity on regulations.
“There is no grand strategy and there is no grand plan,” Stegman said. “But certainly there needs to be coordination across a range of regulatory and executive agencies.”
Rental payment history was once a key part of mortgage underwriting, but fell by the wayside in the 1990s when automation took over. Fannie and Freddie created their ubiquitous automated underwriting systems in the 1990s, and failed to include rental payment data in those models.
But those models guide credit decisions across a massive $7.2 trillion mortgage portfolio, and are also baked into the mortgage securitization process too. That secondary market places a lot of value on consistent datasets across lenders and portfolios.
With that in mind, the authors of the report says that even if the FHFA approves alternative credit scoring models, any switch would likely take years to implement.
That said, some progress is being made. Earlier this year, Fannie Mae said it will start including positive rental payment histories in its underwriting process. The plan, however, depends on cooperation from lenders and borrowers. For loans that Fannie Mae’s automated underwriting system rejects, the GSE now checks to see if 12 months of positive rental payments would be enough to make the applicant eligible for a loan. If so, Fannie Mae then alerts the lender, which can then ask the prospective borrower to share their bank account information with it.
Freddie Mac takes an alternative approach, encouraging landlords to provide access to rental payment data by recouping a portion of the closing costs for homes it finances. In exchange, the landlord would use a platform that reports on-time rent payments to the credit bureaus. But sharing the data also hinges on consent from the prospective borrower.
