Will recent, broader mortgage-lending guidelines become the new normal?

In mid-October, Fannie Mae announced a loosening of the credit and income reporting requirements for potential mortgage customers. President and Chief Executive Officer Timothy Mayopoulos noted that the goal of these changes is “…to make sustainable homeownership a reality in communities across the country while reducing risk for taxpayers.”1 Fannie’s announcement comes at a time when the economy seems to be headed upward – with a few indicator “hiccups” along the trendline – and the industry is trying to appeal to both “boomerang” buyers, who fell out of and now want to jump back into homeownership, and Millennials, who continue to tantalize and tease about being the next “bulge buyer bracket.”

On the credit side, Fannie will be implementing a mid-2016 switch to using trending, instead of outstanding, credit data for purposes of underwriting qualification. It represents a mind-set switch from wanting to see “in-a-vacuum” credit activity – outstanding balances, on-time or delinquent payments – to considering a borrower’s big picture, month-to-month credit history and information. What are their payment habits? How much debt do they carry every month? Are they paying just the minimum(s) and carrying the balance(s) forward or wiping the slate clean at the end of each period? This new approach will help lenders do a better job of profiling a borrower’s potential (and risk) and give those borrowers with less credit activity/history a better chance of seeing higher scores and qualifying for a mortgage.

Also launching in 2016, Fannie will be including a non-traditional credit function into its automated Desktop Underwriter system. Currently, lenders have to manually pull and evaluate files of borrowers who lack traditional credit ratings/history from a reporting agency – no credit cards, loans, etc., but have regularly paid rent and other bills. In the near future, Fannie’s updated system will make it easier to evaluate these borrowers and, again, improve their “mortgage-approval odds.”

Consider these changes through the lens of the two constituencies mentioned in the introduction. Home owners who went “off the grid” after a foreclosure and, after getting their financial houses in order, rented and disavowed credit cards. Millennials who may have witnessed their parents’ credit woes and avoided revolving accounts and loans like mystery leftovers found hidden in the back of the freezer, or are too young to have a robust credit history. Fannie has just given them hope that 2016 may be the year that they get – or get back into – a house.

If Fannie’s changes will bring smiles to those on the credit margins, their anticipated income-verification process will be music to the ears of those who make a living as contractors and consultants. In a recurring theme, 2016 will also see the Desktop Underwriter let lenders do direct borrower income verifications – no more scrambling by borrowers to collect paystubs, etc., to put together a “proof-of-income portfolio” for a lender. Consider how the more than 53 million Americans doing some kind of freelance work, including 21.1 million independent contractors, must feel knowing that the dreaded paystub will no longer be an impediment to completing a mortgage application.2

These changes have their proponents and detractors. On the one hand, lenders are welcoming the technological “assists” that will make their jobs easier and the data-collection shift that will allow them to qualify more borrowers – and, of course, borrowers are grateful for their soon-to-be re-energized mortgage opportunities. On the other hand, critics point to the last time mortgage standards were loosened and the housing crisis that followed thereafter.

One thing is certain: between the institution of the new TRID rules, Fannie’s recent actions and whatever else is waiting beyond the horizon, the new industry normal is a more borrower-friendly environment. Only time will tell if this is a long-term “warming trend,” or if what some see as the inevitable result will lead to a return of the lending “ice age.”

  1. Dosberg, Callie, “Fannie Mae Announces Innovations for Lenders, Borrowers,” Fannie Mae, October 19, 2015, http://www.fanniemae.com/portal/about-us/media/corporate-news/2015/6305.html.
  2. Marton, Kraig, “The Death of the Individual Contractor: A Growing Trend Points to an Uncertain Future,” JD Supra Business Advisor, October 30, 2015, http://www.jdsupra.com/legalnews/the-death-of-the-individual-independent-46783/.
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Nov 19, 2015