Report calls for rent payment history in underwriting

Utility, telecom and rent payment data should be used in mortgage origination, especially as federal regulators say they could focus on improving racial equity and update their credit scoring models.

So argued a report released Tuesday by Michael Stegman, a nonresident fellow at the Urban Institute and former senior policy adviser for housing in the Obama White House, and Kelly Thompson Cochran, deputy director of FinRegLab. However, the authors acknowledge that there are numerous obstacles to changing an underwriting process that is dictated in part by Fannie Mae and Freddie Mac.

Including rent data is a critical first step from a racial justice perspective, Stegman and Cochran explain, because renters are disproportionately people of color, and paying a mortgage is most similar to. However: collecting rent payment data is difficult because there are 10 million smaller landlords who make up 44% of the U.S. rental market, the report says.

"It's much more complicated to collect this data than utilities or telecommunications [data] because those two markets are more consolidated," said Thompson Cochran. "It's really important to think about how that infrastructure can be built and subsidized to potentially reach more consumers with."

The standardization of rent payment data also means the cooperation of numerous actors, the authors say.

Stegman said federal agencies such as the Federal Housing Finance Agency (FHFA) could ease the transition by providing funding or providing clear regulations. That's not quite the case right now, although Fannie Mae has taken a first step to include rental payment history.

"There's no grand strategy and no grand plan," Stegman said. "But certainly there needs to be coordination among a number of regulatory and executive agencies."

Rental history was a core part of mortgage underwriting before automation took over in the 1990s. At the time, government-sponsored enterprises were developing the architecture for their now-ubiquitous automated underwriting systems – and these credit models did not include rent payments.

It is these automated underwriting systems that support credit decisions across the GSEs' $7.2 trillion mortgage portfolio. They are also involved in the mortgage securitization process. The secondary market prizes consistent data across lenders and portfolios.

Even if the FHFA approved alternative credit scoring models, the report's authors expect that implementation would take a long time. FHFA, which oversees Fannie Mae and Freddie Mac, launched a study in 2017 to examine the impact of adopting an alternative credit scoring model. Four years later, the study is still underway, although FHFA expects to complete it by early 2022.

FHFA has taken more action on alternative credit scoring than the other federal agency that supports the mortgage market, the Federal Housing Administration.

Unlike FHFA, FHA, which provides critical assistance to first-time homebuyers and borrowers of color, has not yet announced its intention to use a different credit scoring model, although Congress has been trying to push FHA in that direction for more than a year a decade.

In 2009, Congress tasked FHA with creating a pilot program to test with alternative data such as rental history. However, the approval expired in 2013 without FHA taking action. A bill proposed in 2019 to restart the process was not advanced by the House of Representatives.

Earlier this year, advocates asked the Biden administration to direct Housing and Urban Development to use existing programs – many of which serve low-income borrowers and borrowers of color – and its relationships with subsidized rental housing providers to report rental data. However, the path for these initiatives is unclear.

"There are 2 million families receiving rental assistance through vouchers where they pay part of the rent and HUD provides the rest, and it's happening seamlessly," Stegman said. "Expanding rent reporting to include on-time payments to landlords that are part of the voucher program should certainly be open for discussion, along with a number of other rental assistance and self-sufficiency programs that HUD is implementing."

There are moves by federal regulators that do not require congressional approval, and some are underway. Fannie Mae said earlier this year that it would include a positive rental payment history in its underwriting process.

But Fannie Mae's plan depends on additional cooperation from both the lender and the borrower. For loans that Fannie Mae's automated underwriting system rejects, the GSE now considers whether 12 months of positive rent payment history makes the loan eligible for assistance. If so, Fannie Mae notifies the lender. Then, the lender can ask the prospective borrower for permission to share his or her bank account information with the GSE, if desired.

Freddie Mac has taken a different approach. It hopes to encourage landlords to provide access to rental payment data by recovering a portion of closing costs for properties it finances. In return, the landlord would use a platform that reports on-time rent payments to the credit reporting agencies. However, sharing the data also depends on the potential borrower's consent.

The report's authors hope to use the new urgency to close the racial homeownership gap.

"It's not going to happen overnight," Stegman said. "But we hope to bring together enough information from these different sources in one place to start a broader conversation about the importance of using alternative data in credit underwriting."