A government-sponsored business, Fannie Mae does not deal directly with Americans, but is a major mortgage seller originating in the US, and also offers a variety of loan products through financial institutions. money. At the end of 2022, Fannie Mae announced that it adapted its automated system Desktop Underwriter – widely used by lenders – to look at bank records for borrowers with no credit.
The change in underwriting was due to the large differences in US homeownership rates by race. While nearly three-quarters of white Americans will own homes by the third quarter of 2022, less than half of black and Hispanic Americans will own homes, according to the US Census Bureau.
“This is another tool in the toolkit to attack that problem,” said Fannie Mae CEO-President and Head of Single-Family Business Malloy Evans.
Fannie Mae isn’t the only major player in the mortgage market seeing a narrowing of the housing racial gap. Bank of America last year launched a mortgage program with no down payment for home buyers in smaller neighborhoods.
Who is ‘invisible debt’?
For most American consumers, credit score the most important factors in qualifying for a mortgage and determining the cost of that mortgage. While mortgage lenders also consider factors like loan-to-value and debt-to-income ratios, three-digit credit scores are plays a major role in determining the borrower’s interest rate.
What about the tens of millions of Americans who don’t have credit, because they don’t use credit cards or take out car loans? They may have a history of credit management and integrity, but credit scores often do not reflect activities such as rent and utility payments. As a result, these buyers often lock themselves out of the housing market.
Fannie Mae called a 2015 explore by the Consumer Financial Protection Bureau, which found that about 26 million US adults have “invisible credit” – they have no history with any of the nation’s credit reporting companies. Another 19 million consumers have unverifiable credit files, meaning their credit history is insufficient or ineffective to earn the triple-digit score valued by wealthy Americans. In total, 45 million consumers do not have a credit report that can be scored, the regulatory agency reported.
Black and Hispanic Americans are featured in those numbers, according to the Consumer Financial Protection Bureau. While 15 percent of Black and Latino consumers are uninsured, only 9 percent of whites and Asian Americans fall into that category.
The official poverty rate in the United States is 12.8 percent, according to the Census Bureau, which means that about 42 million Americans are likely too poor to consider home ownership.
Having no credit score is not the same as having no financial strength, however. Fannie Mae is targeting the millions of Americans who have money to buy homes but have avoided traditional credit products, perhaps out of fear of spending. “Many of these borrowers have deliberately chosen not to make loans,” Evans said.
How the new rules work
Fannie Mae’s new guidelines offer a solution. The company has revamped its automated applicant review system, Desktop Underwriter. Mortgage brokers and loan officers who originate loans (which ultimately sell to Fannie Mae) use Desktop Underwriter to enter borrowers. If the applicant does not have a good credit score, Desktop Underwriter considers this information from the applicant’s financial and bank statements. Fannie Mae says it can review 12 months of bank statements to evaluate a person’s credit credit.
The goal is to identify Americans who are there prepare for home ownership even if they haven’t used credit cards or built credit scores.
The latest tweak to Fannie Mae’s mortgage underwriting The way is not to loosen credit standards, Evans said. But, the idea is to identify borrowers who are not seen by the normal loan system, but there is a small risk of failure.
“Buyers should benefit from their money management habits and a steady flow of income when buying a home, even if they don’t have a history,” he added.