As the pendulum swings from a red-hot refinance market to a high-effort purchase loan market, mortgage lenders are assessing the changes they must make to succeed in the years ahead. Economists agree that residential mortgage volume will contract substantially this year.
This past December, the Mortgage Bankers Association predicted a year-over-year origination volume decrease of 33.7% in 2022. Although purchase volume is predicted to rise, a combination of tight credit constraints and housing affordability will keep a collar on purchase growth. Given these market conditions, what’s a mortgage originator to do?
Positive payments
One surefire way to increase home-purchase originations is to expand the universe of clients you serve. While dipping your toes into nonqualified mortgages and niche lending markets is appealing to many, getting a new lending program off the ground requires a good deal of operational lift. Luckily, there’s a way to extend homeownership opportunities to more borrowers in short order with minimal operational disruption.
To the good fortune of consumers and mortgage lenders, Fannie Mae added a positive rent-payment history feature in September 2021 to its Desktop Underwriter (DU) system. This effectively enhances homeownership opportunities for many creditworthy renters who have consistently made their rent payments.
There is a solid business case to be made for considering a mortgage applicant’s rent-payment history. Simply put, many renters have both the willingness and capacity to pay a mortgage. Multiple studies show that rent-payment history typically increases credit scores, but to the detriment of many, fewer than 5% of positive rent payments are reported to the credit bureaus by landlords.
In order for a new initiative like this to succeed, it needs support at the lender level, education programs for mortgage originators to explain the program’s details and marketing efforts to reach consumers. So far, this has happened with many lenders, but not everyone has gotten on board.
Potential opportunities
While it’s known that incorporating rent-payment history into the credit assessment process will expand homeownership opportunities for many qualified renters, the big question is, what’s the potential volume of business? Analysts have yet to release definitive numbers, but there is enough existing data to speculate.
The U.S. Department of Housing and Urban Development reported that there were 43.6 million renter-based households in 2019. The First-Time Homebuyer Market Report from Enact (formerly Genworth Mortgage Insurance) found that there were 2.38 million new homeowners in 2020 while the National Association of Realtors reported that 31% of purchases made last year involved first-time homebuyers, so it is evident that lots of room for growth exists in the first-time homeowner segment.
Consumers also are expressing demand, with a Lending Tree survey from last year finding that 76% of renters would rather own a home and 32% of this group stating that credit history is one of their biggest obstacles. With the potential to help more borrowers while increasing origination volume, the addition of positive rent history is a win-win. As Federal Housing Finance Agency acting director Sandra L. Thompson put it, “There is absolutely no reason timely payment of monthly [rental] housing expenses shouldn’t be included in underwriting calculations.”
Luckily for lenders, many already work with one of Fannie Mae’s authorized report suppliers. That’s because DU’s positive rent-payment history feature is derived from asset data furnished by approved digital verification of asset (VOA) providers.
DU is able to recognize recurring rent payments within the VOA report and factor them into the credit-eligibility assessment for qualified first-time homebuyers. In summary, lenders already getting VOA reports from a Fannie Mae-authorized report supplier should not have to make many, if any, operational changes to begin helping consumers get into homes using positive rent-payment history.
Unfortunate misconceptions
All of that said, there are two misconceptions about Fannie Mae’s rent-payment program that should be dispelled. These stand in the way for thousands of qualified borrowers to build generational wealth through homeownership while causing lenders to miss out on responsible home-financing opportunities.
The first myth is that an assessment of rent-payment history could negatively impact some borrowers’ credit evaluations. Because of the way the program is set up, this cannot happen. DU only considers positive rent-payment history. The reason why is because even if a rent payment isn’t automatically recognized in a VOA report, it does not mean that it didn’t occur.
Renters often pay with cash or transfer funds to landlords using apps not associated with their bank accounts. Thus, mortgage applicants will not be penalized if DU is unable to verify their rent-payment history via bank-account data. These applications will simply be assessed using the same underwriting methods that have long been in place.
The second myth is that by only assessing positive rent history, Fannie Mae is “inappropriately opening” the credit box to consumers who have a history of late or missed payments, thus introducing increased risk. This is categorically false. Again, Fannie Mae has found that by examining bank-account data for transactions in the amount of an applicant’s rent and corroborating this with their 1003 form, positive rent-payment history can be identified and used in underwriting. Because tenants may pay rent via other methods, Fannie Mae cannot infer that a lack of bank transactions equals nonpayment.
Thus, the program is not dismissing negative rent-payment history, but there is not a good way at the moment to confidently establish negative rent history on a broad scale. It should be noted that missed rent payments reported to credit agencies are already taken into consideration (and will continue to be) by underwriters.
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The case for positive rent-payment history is clear. It’s a low-risk, high-return way to expand your universe of clients while helping the 20% of the U.S. adult population with little to no credit history — a group in which Black and Hispanic people are disproportionately represented — build generational wealth through homeownership. So, why wait? ●
