Always Pay the Rent? It May Help Your Mortgage Application. – The New York TimesDecember 20, 2021
For decades, regular payments to a landlord haven’t counted for much for many tenants trying to get a mortgage. Fannie Mae aims to change that.
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Later this month, a group of renters in the United States will get a new break when they try to become homeowners: Their history of consistently paying their landlords will count toward qualifying for a mortgage.
Fannie Mae, the federally backed institution that buys mortgages from the banks and other financial institutions that size up and underwrite aspiring borrowers, effectively sets many of the standards for who qualifies and what data counts. Now, it plans to peer into many people’s bank accounts — with their permission — for a record of regular rent payments.
It is possible to both overstate and understate the importance of what seems, at first, like a technicality related to the necessary consideration of a mortgage applicant’s creditworthiness.
On one hand, the convoluted, multistep process that Fannie is using will mean many people won’t benefit from it at first. Moreover, its data shows that only 17 percent of people who hadn’t owned a home in the previous three years and wouldn’t have qualified for a mortgage before might do so now.
On the other hand, those 17 percent are drawn from a group that is disproportionately people of color, many of whom have limited credit histories and come from marginalized groups on the wrong side of a decades-long wealth gap. Buying a home and building equity through monthly mortgage payments can help solve for some of that. And when so many people are vulnerable because eviction moratoriums and extended federal unemployment benefits are expiring, every new or first-time homeowner is a victory for the American dream.
If you are dumbfounded by the fact that the largest payment most renters make each month has little or no bearing on so many of their mortgage qualifications, well, get in line. For many years now, consumer advocates and industry insiders alike have agreed that this is not how things should be.
“There is absolutely no reason timely payment of monthly housing expenses shouldn’t be included in underwriting calculations,” said Sandra L. Thompson, the acting director of Fannie’s regulator, the Federal Housing Finance Agency, in a statement on the day Fannie’s move was announced last month.
In theory at least, millions of people with limited credit history could benefit from the change. There are those who use debit cards and avoid loans as a matter of principle and prudence. Then there are many more who don’t or can’t use traditional financial services or have given up trying to prove that they are creditworthy.
Roughly 20 percent of American adults have no or limited credit history, according to the Consumer Financial Protection Bureau. Black and Hispanic Americans are much more likely to be in that spot than white and Asian Americans.
“While credit history is a key element in evaluating a borrower’s ability to make a mortgage payment, building credit in the United States is not an equitable endeavor,” said Hugh Frater, Fannie Mae’s chief executive, in a blog post.
So rent should count for something. But according to FICO, which uses data from credit reports to build scoring systems that are already part of the mortgage underwriting process, only 0.3 percent of the 80 million or so adults who live in rental housing have any mention of rent in their credit files.
How can this be? I wanted to talk to the three dominant bureaus — Equifax, Experian and TransUnion — about renters. Equifax and TransUnion did not reply at all, while Experian sent a statement in lieu of an interview. As is often the case when I ask after their doings, my request somehow ended up at their industry association instead, even though I hadn’t asked to speak with anyone there.
Francis Creighton, who runs the Consumer Data Industry Association, said it, too, was aghast at the fact that, according to FICO, information on rent payments made up less than 1 percent of the data that companies and others sent to the bureaus.
“It’s a really big problem,” he said. “We desperately want that information on file.”
For the credit bureaus to get it, however, landlords — including hundreds of thousands of people who own an apartment here or a three-flat there — would have to hand it over.
“They have no incentive to do it,” said Laurie Goodman, vice president of housing finance policy at the Urban Institute. It’s worth doing only if everyone contributes, because then the landlords could make use of that new collection of data to screen tenants. And everyone is very much not contributing at present.
Given that the credit bureaus don’t have the rental data that Fannie Mae and others want so much, Fannie developed a somewhat abstruse workaround involving a “desktop underwriter” validation engine and orders for “verification of assets.”
In slightly plainer English, it can work like so: You go to a bank or a mortgage company. It sizes you up and tries to figure out whether Fannie would buy your loan. (In most instances, this determines whether you can get a mortgage in the first place — banks generally want to sell their loans quickly to get money to underwrite more loans, so they may not underwrite one that Fannie won’t take.)
If Fannie would not buy your loan — but that “engine” determines that a record of rent payments might help change Fannie’s mind — you can give a third party that works with the various entities permission to examine 12 months of bank statements. (Only people who have not owned a home in the last three years qualify.) Then the bank and Fannie search for proof of your making the rent. If it’s there, you may clear the bar after all.
What constitutes proof? A regular payment you made with a check or electronically, say through some kind of landlord payment portal. Payments through Venmo and other apps are fine, too.
Regular payments to a roommate or relative should be readable as well. And the various parties won’t snoop on your other spending and make judgments about that, according to Fannie. There doesn’t seem to be any way for it to know that you’re in some kind of illegal sublet, either.
One crucial factor is this: The new system is supposed to only help, not hurt. Missed or irregular payments won’t lower the odds of qualification, unless they are the rare ones that have somehow hit an applicant’s credit history. That is useful now that eviction moratoriums have expired or are about to.
Fannie’s general counsel, in a pointed post on LinkedIn, made sure to note that when rent payments do turn up on a credit report, it’s often in a negative context instead of the positive-only one that Fannie is using. That can happen if a landlord’s collection agency has placed a black mark on a report.
If this all sounds too good to be true, it almost certainly is, at least a little. Fannie is deploying its systems in new ways, so there will be bugs and errors. Mortgage applicants have to respond to texts and emails to grant permission, and some may miss those cues, blow them off or dismiss them as spam or worse. Mr. Creighton of the Consumer Data Industry Association, who would very much like it if Fannie used additional data and systems that included his members, called it jury-rigged. That doesn’t seem inapt.
Moreover — and crucially — not every mortgage lender will have the necessary relationships with third-party asset verification services right away. Fannie figures that the lenders behind more than half the loans it buys will have the potential to work this way, at least in limited capacity, starting next Saturday. Fannie refers to its move as “an important step forward in expanding mortgage access for thousands of renters.” That’s not nothing, but it’s a drop in the bucket of a very large market.
It could get bigger. Then again, here’s something else that might happen — lenders that like the system could crave even more data about transactions. Imagine what sort of mischief they could get up to while passing judgment on your spending habits. Might bank account access become mandatory someday, at least in some instances?
But that is all part of an uncertain future. What is true today, according to an Urban Institute analysis of data that already exists, is that rental payment history predicts one’s ability to handle a mortgage “significantly” better than credit scores.
Both Fannie and Freddie Mac, the similar entity that also buys up mortgages and turns them into securities, already do count rent in certain circumstances when people have no credit history at all. If that wasn’t going reasonably well, Fannie presumably would not be automating and greatly expanding its efforts.
Meanwhile, according to Fannie’s own survey data, aspiring Black homeowners say low or no credit history or credit score data is their biggest hurdle to clear 29 percent of the time, versus 18 percent for white homeowners. Rates of Black homeownership are roughly 30 percentage points lower than they are for white buyers, in part because of what Fannie’s chief executive called “historically racist government policies.”
It may take nearly as long to close that gap as it did to open it. But now, at least, there is a growing effort to solve for one of the most obvious problems of all: If you can pay your rent, that ought to count for something when it comes time to buy your own home.