December 9, 2021

New GSE programs aim to address credit access

The nation’s mortgage-backing giants - Freddie Mac and Fannie Mae – have each recently announced meaningful steps toward increasing homebuying credit access.

Last summer, Fannie Mae began allowing lenders to submit histories of recurring rent payments as evidence of credit-worthiness through Desktop Underwriter. But this fall, Freddie took it a step further.

By incentivizing the action with closing costs credits and discounted fees on multi-family loans, Freddie Mac is encouraging operators of multifamily properties to report on-time rent payments to the three major credit bureaus on their own.

The platform also handles the administrative and compliance burden these for property owners, which had been their largest rent-reporting hurdle.

A side benefit for the renters is more credit score awareness and help monitoring their on-time rental history.

There's more. Another Fannie Mae underwriting upgrade is a very big deal for multiple borrowers on one loan, potentially helping millions with credit challenges to qualify for home purchases or refinances.

Since Sept. 18, lenders may base determine eligibility for many Fannie-backed loans by averaging median credit scores of all borrowers on a loan transaction, rather than the previous method of using only the lowest median score.

In the past, multiple individuals trying to qualify for a single purchase or refinance loan were often rejected, because in many cases, they had vastly different credit profiles. Median scores are determined by taking the middle of three – or the lesser of two - credit scores obtained on each borrower.

For example: If “Borrower 1” had a median credit score of 600 and “Borrower 2” had a median credit score of 700, the borrowers would automatically be ineligible, because the lower score fell beneath the minimum threshold of 620.

It didn’t matter how high any individual borrower’s credit score was, only that the lowest score was too low. A common solution was to remove the lower-credit borrower from the loan, regardless of his or her income. With today’s real estate prices, trying to qualify for a mortgage on a single income can come with its own affordability challenges!

With the update, Fannie Mae’s automated “Desktop Underwriter” (DU) averages all borrowers’ median scores – in this case 650 – to determine initial eligibility.

The new system doesn’t change risk assessment. Ultimate approval depends on a detailed analysis of credit reports and other data. Based on its own analysis, Fannie Mae researchers found that the average median credit score was more indicative of how the loan would perform. The higher the co-borrower’s score, the lower the risk, regardless of the lowest borrower’s score.

But any increased access could be a great boon to millions of renters who have little to no traditional credit history, as well as to demographic groups with historically lower credit scores and disproportionate barriers to establishing traditional credit.

Housing advocates have called upon the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, to go even further in its offerings for underserved communities.

Recent measures include expanded eligibility for low-income refinances and incorporating desktop appraisals into selling guides for new purchase loans. In another Fannie Mae access enhancement planned for 2022, third-party entities may provide home education services for most of its affordable mortgage programs.

Fannie and Freddie don't directly lend to borrowers. Rather, they buy mortgages and repackage them as mortgage-backed securities (MBS). Together, these “government sponsored enterprises,” or GSEs, own more than 60% of all U.S. residential mortgages. So, if Fannie or Freddie says a loan isn't a good risk, banks typically reject it.

Despite falling home inventories, existing home sales jumped an impressive 7% in September, continuing to rise by another 0.8% in October. Pending sales of existing homes jumped 7.5% in October, auguring another surge in November. Official totals come out Dec. 22. Real estate experts surmise buyers are motivated to sign contracts by fast-rising rents and anticipated mortgage rate increases.

The Mortgage Bankers Association predicts total origination volume will drop 33% in 2022, as rising interest rates bring a sharp drop in refinances. Purchase originations, however, are forecast to rise 9% to a record $1.73 trillion.