Fannie Mae is rolling out a series of new mortgage rules that will make it easier for African-Americans, Latinos and others to qualify for home loans.
Under recently announced guidelines, starting in 2016, Fannie Mae will require mortgage lenders to take into account non-traditional credit data from potential homebuyers, such as a person’s rent payments or utility bills.
The idea is to provide additional mortgage availability to those who may not have traditional credit histories, and thus have been largely locked out of the home-buying process.
“Our aim is to help lenders serve their customers efficiently so that more qualified borrowers have access to mortgage credit,” Fannie Mae President and CEO Timothy Mayopoulos said in a statement. “Our goal is to make sustainable homeownership a reality in communities across the country while reducing risk for taxpayers."
Minorities Disproportionately Impacted
A 2015 report by the Consumer Financial Protection Bureau revealed that 188.6 million American adults, or 80% of the population, have credit records that can be scored using traditional models, such as the FICO credit score.
But 20% of all adults in America – about 45 million people – lack a traditional credit score, the CFPB found. These individuals are disproportionately Black, Latino, young adults and low-income consumers.
About 26 million of these individuals are so-called “credit invisible” and have no current credit files with Equifax, Experian and TransUnion, the three major credit reporting agencies. The remaining 19 million people have “thin” credit files, meaning their credit history is so scant that traditional credit scores can’t be generated for them.
Currently, those with thin credit either can’t get a mortgage or must have their mortgages manually underwritten, which some say is a time-consuming and cumbersome process.
Fannie Mae now says it is building a new capability through its Desktop Underwriter automated underwriting system, which is widely used by lenders all across the country. The system revisions will help lenders more effectively serve borrowers who do not have a traditional credit history.
Fannie Mae said it will provide guidance to lenders about this new capability in the coming months, but the agency noted that the new functionality would be available in 2016.
Rival Credit Scoring Models
The plan by Fannie Mae to look at broader financial data from consumers is significant because Fannie is the dominant government agency in the housing business. Fannie Mae doesn’t make loans. Rather, the agency buys mortgages from lenders and guarantees those home loans in the event that borrowers default.
Officials from VantageScore, which is a key rival to the FICO score, have long been pushing Fannie Mae – as well as Freddie Mac – to move away from current rules that require mortgage lenders to use FICO credit scores alone.
VantageScore representatives say their credit scoring model is more inclusive, better predicts credit risk, and offers a host of other beneficial features, such as the use of non-traditional data, including rent payments and utility bills.
Commenting on the new rules from Fannie Mae, VantageScore CEO Barrett Burns said: “VantageScore Solutions is proud to be the catalyst for innovations occurring in the consumer credit risk management industry, and we are encouraged that Fannie Mae is moving towards upgrading the antiquated systems that have unfairly excluded millions of consumers for many years.”
“Despite few details on their plans, many previously unscoreable borrowers may be positively impacted by Fannie Mae’s decision to facilitate automated underwriting for consumers with limited credit histories, which is an area that VantageScore has pioneered through its model architecture and usage of alternative data,” Burns noted.
He also added: “It is imperative that along with its upgrades, Fannie Mae preserve the competition that has led to these new innovations and ensure that no single branded model developer can monopolize the market. Moreover, it is extremely important that whatever models are used in the future have been validated and are ‘recession-tested’ to ensure safety and soundness.”
VantageScore officials weren’t the only ones pushing for reforms in the world of credit scoring and mortgages.
Previously, the National Association of Federal Credit Unions had also asked that lenders be allowed to use more “updated and accurate credit scoring models” in order to “expand access to [mortgages] for those consumers who are unable to be scored by the FICO model.”
A coalition of seven consumer advocacy groups, lenders and credit bureaus had also written to financial regulators, saying the mandatory use of FICO scores “disenfranchises millions of potential well-qualified borrowers” with thin credit files.
Keosha Burns, a spokesperson for Fannie Mae, said the agency continues to explore ways to make lending more fair, inclusive and responsible.
“We are currently studying those (alternative credit models), and have been for a while,” Burns said. But she said Fannie’s emphasis is on “taking in the credit data,” and not on focusing on “credit scores or any one scoring model.” “We have our own algorithm,” she said. “We also recognize that things are different than they used to be pre-recession,” Burns added, “and we understand that there’s more than one way to be a credit worthy and qualified borrower.”
Other Flexible Mortgage Guidelines
To that end, Fannie will make another change in 2016: it will require two credit bureaus, TransUnion and Equifax, to provide more “trended” credit data about consumers. Trended data offers a longer-range, more historical analysis of a person’s credit habits, such as whether a borrower routinely pays off credit card bills in full each month or regularly carries a balance.
Separately, Burns noted that Fannie Mae has recently undertaken other steps to promote access and sustainability in the housing market. For instance, under its HomeReady program, which requires borrowers to get housing education, borrowers can get into a home with as little as a 3% down payment.
Homebuyers in the HomeReady program can also get mortgages with less stringent underwriting criteria.
For example, borrowers can use income from a non-borrower household member – like a parent or another relative – to obtain mortgages with a debt-to-income ratio of up to 50 %, above the normal DTI limit of 45%.
HomeReady borrowers can also use rental income from an attached dwelling unit, say, if someone lives in their basement. And they can even use boarder income to qualify for a home loan.
Observers say these changes are of particular benefit to immigrants, minority communities and multi-generational households.