BLOG VIEW: It is no secret that homeownership is a large part of the American dream, as it is the primary contributor to successful individual wealth-building.
Research has consistently shown that communities with a high rate of homeownership realize substantial social benefits and tend to flourish and be more economically resilient, with children and families more likely to thrive and build generational wealth.
The entire mortgage industry, including the GSEs, mortgage collaboratives, lenders and mortgage technology providers, are placing an increased emphasis on removing barriers to homeownership for minority and marginalized groups. To help facilitate greater inclusion to the mortgage lending process, they are working together to introduce more tools, technology advancements, access to data and specific programs tailored to certain populations.
While these additional resources have already proven beneficial, there are additional steps the industry can take to help further improve the mortgage process for these communities.
Expand Customer Base
Simply stated, achieving homeownership is more difficult for minority and marginalized communities due to structural barriers in securing a traditional mortgage. A traditional credit history consists of whether payments are made on time, what debt a consumer owes, and what might be in collection. This credit history is then used to help determine creditworthiness and costs of credit.
However, according to the Consumer Financial Protection Bureau (CFPB), 26 million Americans are what is known as “credit invisible” (meaning they have no established credit history) or are living with subprime credit (scores below 668). Another 19 million are so-called “thin file” consumers, with not enough data to produce a traditional credit score.
As lenders enforce stringent lending policies and apply risk measures or pricing premiums that become insurmountable, it becomes increasingly difficult for households with less than perfect credit to buy homes and work to accumulate wealth that can carry them through difficult financial times.
While credit reports continue to provide an indication of credit history and past financial behaviors, alternative forms of data can be considered in order to get a clearer picture of one’s complete financial health.
Rent payments, surprisingly, are currently not widely reflected in traditional credit reports or credit scores, although they are often one of the largest and most consistent bills that millions of consumers pay each month. With more than 44 million households currently renting in the U.S., including rental payment data could go a long way toward helping minority and first-time home buyers.
Rent aggregators – large and/or national property management companies – have an opportunity to make a large impact by reporting positive rent payment data. Doing so could help provide consumers the chance to establish and build credit history based on something they already do – pay their rent on time. Both Fannie Mae and Freddie Mac have recently taken steps to encourage rent aggregators to report this data.
In September 2021, Fannie Mae launched a new feature in its automated underwriting system so that recurring rent payments could automatically be identified in the applicant’s bank statement data. In a similar move, Freddie Mac announced an initiative which incentivizes landlords who agree to report positive rental payment data. They’ve even negotiated discounted fees with a software provider that makes the data reporting possible.
Showing a positive and consistent rent history is one of the largest factors that demonstrates a borrower’s ability to pay a mortgage on time and is one of the biggest steps in providing underserved consumers with better access to credit.
In addition to rent payments, utility payment information could also help provide greater insight into a consumer’s credit behavior. This also includes reporting of cellphone bills and payments, which is important because the majority of Americans, 97%, currently own a cellphone.
As homeownership continues to be a top wealth-builder for the majority of the U.S. population, ensuring minority and marginalized communities are able to participate in, and achieve the dreams of homeownership is crucial. Through advancements in access to alternative data and insights, and streamlined processes for companies to report that data, the industry can be better positioned to extend this opportunity to even more Americans, resulting in a stronger and more secure economy for all.
Jennifer Henry is vice president of strategy and marketing with Equifax Mortgage & Housing Services, where she is responsible for pricing, product management, product marketing, campaign management and mergers and acquisitions.