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On-Time Rental Payments Helping to Pave the Road to Homeownership

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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.”

New Opportunities

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.

The views expressed in this post are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System. New York Fed content is subject to our Terms of Use.

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Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

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(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

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(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

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(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

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