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Maria Carmelita Recto and Edison Reyes, Communications and Outreach – New York Fed Dec 7
In the United States, buying and owning a home is seen as a critical wealth-building tool, particularly for lower-income households and people of color.
For many such households, one hurdle to homebuying is that credit scores — which are key factors in mortgage underwriting — typically do not reflect on-time rental payments. Yet a history of paying rent on time may be significantly more useful than a credit score when it comes to predicting whether a prospective buyer might remain current on mortgage payments, according to research from the Urban Institute.
Fannie Mae — a government-sponsored enterprise charged with providing liquidity to the nation’s mortgage finance system — recently said it would incorporate on-time rental payments in the evaluation of mortgage applications of first-time homebuyers. This is a significant change, as Fannie Mae’s mortgage purchases are a central underpinning of housing finance in the United States.
How it Works
Fannie Mae provides liquidity by purchasing home loans made by private firms. In 2020 alone, it provided a record $1.4 trillion in liquidity to the housing market. Because of its size, any change in its underwriting policy has significant implications for homebuyers.
Under the new underwriting provision, when a mortgage application is rejected, Fannie Mae performs additional checks to see (1) whether the applicant is a first-time homebuyer, and (2) whether the applicant can qualify with a 12-month record of on-time rental payments. If both situations apply, Fannie Mae recommends that the lender seek permission to access the applicant’s bank statements. If the statements show consistent rental payments, the loan can qualify for sale to Fannie Mae.
In announcing the change, Fannie Mae noted that the move “is but one important step in correcting the housing inequities of the past, creating a more inclusive mortgage credit evaluation process going forward, and encouraging the housing system to develop new ways of safely assessing and determining mortgage eligibility in order to fairly serve all potential homeowners.”
On November 19, the New York Fed hosted a roundtable discussion on Fannie Mae’s recent decision and its early impact. We brought together experts on data, lending, and housing and financial counseling to examine what the change might mean for homebuyers and to consider other possible steps to expand assessments of creditworthiness. Among the participants was Laurie Goodman, a former New York Fed economist and founder of the Housing Finance Policy Center at the Urban Institute, who presented some of her work highlighting what this underwriting change might mean.
Here are key takeaways from the discussion:
- Housing finance organizations and housing nonprofits would benefit from greater awareness of this change. Some participants said not everyone working in housing is familiar with Fannie Mae’s new policy, and that educating these organizations could reshape their outreach to potential homebuyers. For instance, Community Development Corporations (CDCs) could tell clients in their home counseling programs about the change.
- CDCs can play a key role in wider adoption. Rental payment history is currently identified through bank statements, which may only be accessed through Fannie Mae-approved asset verification vendors. To broaden adoption, an attendee suggested creating a certification program for CDCs, many of which have longstanding relationships with landlords, which could serve as an alternative to bank statements.
- The change could provide more momentum and urgency to governmental and private-sector efforts to advance financial inclusion by encouraging more people to establish bank accounts. Because bank statements are the primary reporting mechanism, this could encourage people in low- and moderate-income communities to establish bank accounts. Banking products could also pair with local individual development account programs, which provide matched savings accounts to encourage low- and moderate-income clients to save money to buy a home.
- Payment history for utilities, phones, internet, and student loans could also be factors in creditworthiness, and there should be better accounting for income generated from the gig economy. Attendees noted that while gig economy jobs offer flexibility, workers often have difficulty obtaining mortgages, as many lenders find it difficult to use their income in approving applications. Separately, while credit scoring counts student loans as a debt obligation, it doesn’t capture the possibility of increased earnings through education.
About Community Development
The New York Fed’s Community Development team is focusing on interventions that can reduce barriers to economic mobility for low-and moderate-income people, with a focus on the economic drivers of health, household financial well-being, and climate-related risk. For more, see Community Development & Education.