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Fannie Mae Underwriting Changes To Lending Qualifications To Include Rental Payment History

Fannie Mae Underwriting Changes To Lending Qualifications To Include Rental Payment History

Real-Ativity October 25, 2021 5 hours ago
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Oct

25

2021

FANNIE MAE CHANGES TO LENDING QUALIFICATION CRITERIA


The Federal National Mortgage Association, commonly known as Fannie Mae, the country's leading purchaser of mortgage loans, announced automatic underwriting system changes to lending qualifications to include rental payment history.  Also, if more than one borrower is applying for a mortgage, an average credit score may be used to meet the 620 minimum requirement, rather than each individually.  The new features implemented on September 18, 2021, show the association is looking for ways to increase first-time homeownership opportunities.  Consistently including rental history on loan applications is expected to allow 17% of potential homebuyers a better chance at qualifying for a loan, according to Fannie Mae as cited by Florida Realtors.  The Chief Executive Officer of Fannie Mae, Hugh R. Frater, stated in the August 11, 2021 press release -

"It 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. We look forward to working with our industry partners to do what we can together to address this and other barriers to homeownership.”

Fannie Mae's Desktop Underwriting system will pick up reoccurring rent payments on bank statements paid by check or electronically.  According to Fannie Mae, roughly a fifth of the population does not have a traditionally recognized credit history, and minorities account for a disproportionate percentage.  In 2019, a study by the University of California, Berkely illuminated that minorities pay more in interest rates and pay more overall. Primarily due to a borrower having a less established credit history and less than 20% for a downpayment, lenders utilize risk-based pricing, leaving minorities paying around 11% to 17% more on the life of a mortgage.  Using a median credit score and positive rent payment history are two changes designed to positively help the credit assessment aspect of applying for a mortgage loan.  Throughout this piece, we will address what this means, the state of the housing market, and how this change to lending qualifications may contribute to the evolving fair and equitable housing situation.  Additionally, we will round this piece up with frequently asked questions.


alt text = "a computer reading mortgage application sits on a wooden desk with common office supplies and two plants

THE CHANGES TO LENDING QUALIFICATION

WHAT IT MEANS

Not to be confused with pre-qualification, a conversation that holds little weight with lenders, getting pre-approved for a mortgage with official underwriting requires the potential homebuyer to gather a slew of information to assess the risk for the lender.  They do so by verifying identity, income, assets, and credit.  Lenders want proof that a potential borrower has paid back their previous debt on time.  There are numerous types of lenders to choose from and homebuyers should explore all their options to get the best rate and terms.  Traditional underwriting has made preapproval difficult for many, including those who do not have credit cards or carry financial debt, those who do not need an automobile loan, and those who disagree with traditional banking systems.  Incorporating consistent rental payments in the mortgage credit evaluation process is not new. Many private lenders offer more flexibility and currently leverage this information.  A history of consistent, on-time rental payments is a logical piece to the credit-worthy puzzle.  However, landlords rarely report positive, consistent payments to credit agencies but often report missed or late rent payments.  Fannie Mae has simplified the process by automating the rental history input rather than requiring mortgage applicants to enter it manually.  The idea is to make a more cohesive, intuitive process for the mortgage applicant to include rental history.

IMPORTANT NOTE
Once preapproved, potential homebuyers have around a 45-day time frame to shop around for the perfect lender.  Within that 45-day period, there are no additional negative impacts on your credit score.


THE STATE OF THE HOUSING MARKET

SHIFT TO A BUYERS DOMINATED MARKET IN 2022

Initially, in the Spring of 2020, the housing market abruptly dipped.  The entire world took a tragic hit, hospitals began to overflow, borders shut down, unemployment skyrocketed, and political distress created uncertainty and economic turbulence.  According to Lawrence Yun, chief economist & senior VP of research for the National Association of Realtors, in April 2020, home sales declined nearly 18%, month over month, and slightly over 17% year over year.  Pending sales month over month were down almost 22%, year over year, nearly 34%.  However, home sale price appreciation grew more than 7%, an early sign of what was to come.  By the end of summer 2020, the market heated in favor of sellers.

By January 2021, a strong seller's market emerged.  Year over year home sales went up nearly 24%.  Inventory was short with a 1.9 month supply, while six months' worth of inventory is considered a balanced housing market.  Home prices were up just over 14% year over year.  This uncanny seller's market continued across the country, creating an unreasonably competitive housing market.  For investors, buying a house is the best way to protect your cash when inflation looms.  Property is an appreciating asset, one that will gain value over time.  Buying a home with cash or locking in a fixed, low-interest mortgage rate is a way to avoid inflation on the homebuyer's money.  Because of this uncertainty and inflation rising, investors and second-home buyers flooded the market.

First-time homebuyers stand little chance in 2021 so far.  Often overlooked in favor of investors or cash buyers, many offer above the asking price with quick closing time frames.  These changes to lending qualifications will likely increase the number of pre-approvals, but will probably have little impact on the number of first-time homebuyers getting the closing table in the next six months.  In an interview with CNBC, Dennis McGill of Zelman and Associates talks about their latest research titled "Cradle to Grave."  He explains that once we cycle through the abnormalities caused by the Pandemic, there will be core demand.  Demographics shape core demand.  According to McGill, as cited by CNBC, “There is a downward trajectory of population growth, household formation as well, that’s really going to undermine the need for what’s built.  On the other side of that, you have the development community that’s actually very optimistic about there being a housing shortage and actually very optimistic about how much needs to be built, and they’re actually pressing the accelerator harder than we think they probably should be.”

Due to the latest population and household rates, which showed the slowest growth since the 1930s, some speculate 2022 will deliver a dramatic pivot to a buyers market.  Additionally, the red hot rental market is spiking.  If the rental market starts to cool, and more renters become homeowners, and the housing market cycles back from the Pandemic, many investors may be looking to get rid of single-family and multi-family properties.  Furthermore, with eviction moratoriums mostly lifted federally and regionally and the Regulation X emergency pre-foreclosure review period ending on December 31, 2021, there is a good chance for a flood of inventory to hit the market in early 2022.  Builders may be overcompensating for the stall early on in the Pandemic.  The demand, mainly lying in lower-end priced homes, will not be met as most builders construct high-end homes.  Where do the changes to lending qualifications fit into this entire mix?  More people will be pre-approved for a mortgage, eventually leading to more homeowners.  Plus, if inventory increases, home sale price acceleration should slow, and there will be more affordability for potential buyers.  Future first-time homebuyers are likely better to wait and be sure to shop around for the perfect lender.


FAIR AND EQUITABLE HOUSING ADVOCATES

STEP TOWARDS NARROWING THE GAP IN MORTGAGE DISPARITIES

Both Fannie Mae, established in 1938, and Freddie Mac, 1970, are considered Government Sponsored Enterprises, or GSI's, although publically traded.  They were both created to aid the housing mortgage financial system and keep money flowing so that lenders and lending institutions have enough funds on hand to keep writing mortgages and continue to help Americans buy homes.  When a loan closes at the settlement table, Fannie or Freddie buy that mortgage from the bank or financial institution, bundle it with others into securities, and sell them to investors.  Since the great recession 2007-2009, both entities have been under the government's conservatorship controlled by the Federal Housing Finance Agency, or FHFA.  Soon, the administration will be announcing the nominees for the FHFA's Key Regulator, a position that has the almost autonomous power to restructure homeownership throughout the nation.  Fannie and Freddie account for much of the $11 trillion mortgage market.  NPR correspondent Chris Arnold hypothesizes that Sandra Thompson or Mike Calhoun will land this important position.  Sandra Thompson has been the Acting Director of the FHFA since June 23, 2021, and has decades of experience in consumer protection and risk management.  Mike Calhoun is the Head of the Nonprofit Center for Responsible Lending.  Calhoun has the potential to create a lot of change from the outside.  On October 6, 2021, the Biden Administration announced key nominations in a press release that named Brian Tomney, Capital One Head of the Office of Corporate Investigations, for Inspector General for the Federal Housing Finance Agency or FHFA.  According to the Office of Inspector General Federal Housing Finance Agency website, their mission is as follows:

"FHFA-OIG promotes economy, efficiency, and effectiveness and protects FHFA and the entities it regulates against fraud, waste, and abuse, contributing to the liquidity and stability of the nation’s housing finance system. We accomplish this mission by providing independent, relevant, timely, and transparent oversight of the Agency in order to promote accountability, integrity, economy, and efficiency; advising the Director of the Agency and Congress; informing the public; and engaging in robust enforcement efforts to protect the interests of the American taxpayers."

In a conversation on NPR, Christopher Intagliata and Ailsa Chang discuss the reasons minorities tend to pay more on mortgages.  First, the credit score, second, risk-based pricing, and third, mortgage insurance, required by borrowers who put less than 20% down.  A minority may put the same amount down, have the same credit score as a white person, and still pay more.  The Berkley study suggested the discrimination is both face-to-face and electronically entered mortgages, possibly even in the algorithms.  The Fannie Mae changes in lending qualifications are a beginning. They are a start to addressing one of those issues by including their positive rent history.  It has the potential to be a founding step toward change in the housing market by opening up more opportunities for first-time homebuyers to be eligible for a mortgage.  The Biden Administration has also announced immediate steps to address the housing supply and affordability situation.

In conclusion, we discussed the Fannie Mae changes in lending qualifications, using a median credit score and automatically including positive rental payment history.  We talked about the implementations of these changes concerning the current housing market state.  We went over how these changes might be a step in the right direction toward fair and equitable housing and be a start to narrowing the gap of mortgage discrimination.


 

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FAQ

WHAT IS DESKTOP UNDERWRITER?
Fannie Mae's Desktop Underwriter is the software that automates the mortgage application process.  It assists mortgage lenders in determining the risk rate of the potential borrower.  The applicant must fill out a 1003 form required for federally funded loans.  Then the information is entered into the system, and Desktop Underwriter quickly sifts through data to assess the applicant's risk for a lender.
WHAT ARE THE CHANGES IN LENDING QUALIFICATIONS BY FANNIE MAE?
With the prospective borrower's permission, Desktop Underwriter will automatically pick up on consistent rent payments on verification of asset reports, like bank statements.  Positive rent payment history is a part of the credit assessment.  Previously, many first-time homebuyers may not have known this, and mortgage brokers manually entered the information.  Additionally, if there are multiple potential homeowners to be included on the loan, their collective credit score, or median, can be used to meet the 620 credit score requirement.
HOW DOES RENTAL HISTORY AFFECT THE PREAPPROVAL PROCESS FOR A MORTGAGE, AND WHY IS THIS BEING IMPLEMENTED?
For those who may not have traditional credit or have struggled to build credit, a positive rental history, consistent on-time payments can provide proof of a future borrower's creditworthiness.  Including rent history in the credit risk assessment is being implemented to give more first-time homebuyers a better chance at homeownership.
WHEN APPLYING FOR A MORTGAGE, IS YOUR RENTAL HISTORY CHECKED?
Now, it is easier to include rent history in a mortgage application.  Rental history is flagged automatically, with the applicant's permission, on bank statements, or their verification of assets, from the past 12 months.
WHAT WILL BE CONSIDERED A POSITIVE RENTAL PAYMENT HISTORY?
The system automatically detects rent payments of $300 or more from the past 12 months' verification of assets.
WILL THE FEATURE ADVERSELY AFFECT POTENTIAL BORROWERS?
The feature cannot pick up missed rent or any rent paid with a different method.  The new part exclusively considers positive rental history.
WHO IS QUALIFIED FOR THE NEW FEATURE?
To utilize the positive rent history feature, potential borrowers must be first-time home buyers, shopping for a primary residence, paying $300 or more in rent for the past year with bank accounts documenting reoccurring payments, plus a credit score of 620.  Potential loans with more than one borrower can use both new features, the average median credit feature to reach 620, and the rental history feature.