Imagine mortgage credit standards as a roadway, connecting lenders with potential borrowers who dream of proudly owning. What within the mid-2000s was a wide-open superhighway with few barriers became, following the 2008 housing crash, a one-lane path open simply to probably the most credit-qualified.
As loan defaults multiplied and banks collapsed, lenders abruptly lost their appetite for risk and abandoned their former “if you breathe, you qualify” loan standards. The Urban Institute says lenders might have issued an additional 6.3 million mortgages between 2009 and 2015 “if lending standards had been more reasonable” – for example, such as the pre-housing-crisis mortgage loan requirements of 2001.
With such stringent loan criteria in position, homeownership rates in the U.S. fell sharply, specifically for minority households, according to the Pew Research Center.
“Black and Hispanic households today continue to be far less likely than white households to own their own homes – 41.3% and 47%, respectively, versus 71.9% for whites – and the homeownership gap between blacks and whites has widened since 2004,” Drew DeSilver, a senior writer at Pew Research Center, wrote in a recent report.
Pew research finds that black and Hispanic house buyers have a harder time?qualifying for conventional mortgages than white and Asian applicants – so when approved, are typically charged higher interest rates.
In September 2016, Fannie Mae, the government-sanctioned company that buys many of the mortgages that lenders issue, unveiled two new credit rating initiatives in?its underwriting process. Here’s what those changes may mean, especially to borrowers of color.
Trended credit data
Fannie Mae’s automated loan-underwriting product is how nearly 2,000 lenders see whether a borrower qualifies for any mortgage. Among upgrades set up late last year was the combination of “trended credit data.” This takes credit rating beyond simply noting “yes” or “no” as to whether you paid an invoice on time every month.
Trended data “actually takes into account the number you pay, the level of revolving debt you have and just how that relates to your overall available debt,” says Mike Mondelli, senior v . p . of TransUnion’s alternative data services. Additionally, it compares the amount you paid using what the minimum due was.
It’s a 24-month snapshot of borrowers’ payment patterns. That allows lenders to better predict how borrowers?might pay their bills going forward.
For example, consider two borrowers. One pays off the entire?balance each month or makes a payment greater than the minimum amount due. Another makes only the minimum payment due. Both pay promptly, but when everything else is equal, trended data might help a lender conclude that the first borrower is a lower credit risk.
Use of trended data could move “about 23 million people from a nonprime to a prime score categorization,” Mondelli says.
In 2015, more than one-quarter (27.4%) of black applicants were turned down for mortgage loans, most commonly because of credit rating issues, according to Pew research. And people?with subprime scores – generally considered to be below 670 – pay higher rates of interest.
Alternative credit data
The updated Fannie Mae system also incorporates some alternative credit data, such as rent and utility payments, when it’s available. Mondelli says that details are just beginning to come up.
While debit and credit card companies happen to be adopting alternative credit data, mortgage lenders “would be the last” to create such moves, Mondelli says. This initiative could particularly benefit?borrowers who don’t yet?possess a credit score.
Trended data is the focus for the time being, particularly for?mortgage brokers.
Addressing the cause of tight credit
Karan Kaul, a study associate for the Housing Finance Policy Center at the Urban Institute, doubts if either initiative have a significant impact on minority homeownership.
“It’s a step in the right direction, and i believe we need this task. We always want to improve our credit rating models,” Kaul says. “But simultaneously … this doesn’t address the root reason for why credit is tight.”
Urban Institute research says lenders, typically, continue to be shying from loosening lending restrictions because the scars from the housing crash remain fresh. And lenders are concerned about continued legal action and default risks.
“The issue of tight credit is really a structural problem that is, unfortunately, at this point deeply embedded into the mortgage market, and it’s going to require a multipronged strategy,” Kaul says.
Are minority borrowers getting a break?
Still, there might be some hope for minority borrowers. Mindy Armstrong Kielmeyer, senior product manager at Fannie Mae, says all 1,800 lenders that use its underwriting system have access to the upgrades.
“Trended credit data provides additional information that we can take into account whenever a borrower is around the border of having an ‘approve’ recommendation,” Kielmeyer says.
With alternative credit data, lenders can now underwrite loans for borrowers without?a credit score.?About 15% of blacks and Hispanics?don’t have credit ratings, in contrast to 9% of whites and Asians, based on a 2015 report by the Consumer Financial Protection Bureau.
“Since its implementation, we view countless loan applications underwritten using this enhancement,”?Kielmeyer says.
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Due to an editing error, it was unclear in a previous form of this short article that “hundreds of loan applications” which were underwritten referred to the ones from borrowers with no credit rating. This article has been corrected.