A new report argued that rent payment data, utilities, and telecommunications should be used in mortgage insurance to improve racial equality and help more people from minorities become homeowners.
The report by Michael Stegman, a nonresident fellow at the Urban Institute and former senior policy advisor in the Obama White House, and Kelly Thompson Cochran, deputy director of FinRegLab, argues that including rental data is a critical step from a racist fairness standpoint. That’s because renters are disproportionately black and it’s the single bill most similar to mortgage payments.
However, the report’s authors acknowledge that collecting rental payment data is difficult in a country with 10 million smaller landlords who make up 44% of the US rental market. They also recognize that there are many obstacles in the way of changing the mortgage underwriting process set up by many stakeholders, including Fannie Mae and Freddie Mac.
“The collection of that data is more complex, rather than the facilities or communications [data]Thomson Cochran said in an interview with HousingWire.
Another challenge is the standardization of rental payment data, which requires cooperation from many stakeholders, the authors said.
According to Stegman, federal agencies such as the Federal Housing Finance Agency can facilitate the transition by providing funding and clarity about regulations.
“There is no grand strategy, no grand plan,” Stegmann said. “But certainly there is a need for coordination across a range of regulatory and enforcement agencies.”
The history of rent payments was once a major part of mortgage underwriting, but it fell by the wayside in the 1990s when automation took over. Fannie and Freddie pioneered ubiquitous automated insurance systems in the 1990s, failing to include rental payment data in those models.
But these models guide credit decisions across a massive $7.2 trillion mortgage portfolio, and they go into the mortgage securitization process as well. This secondary market places a lot of value on consistent data sets across lenders and wallets.
With that in mind, the report’s authors say that even if the FHA approves alternative credit scoring models, any switch will likely take years to implement.
However, some progress has been made. Earlier this year, Fannie Mae said it would start including positive rental payment records in its underwriting process. However, the plan depends on the cooperation of lenders and borrowers. For loans rejected by Fannie Mae’s automated underwriting system, GSE is now checking to see if positive rent payments for 12 months will be enough to make an applicant eligible for a loan. If so, Fannie Mae alerts the lender, who can then ask a potential borrower to share their bank account information with them.
Freddie Mac is taking an alternative approach, encouraging landlords to provide access to rent payment data by recovering a portion of the closing costs of the homes he finances. In return, the landlord will use a platform that reports on time rental payments to credit bureaus. But data sharing is also contingent on the consent of the potential borrower.