More than a year ago, Radian sat down with a group of lenders and community groups to better understand what was preventing people from qualifying for GSE-backed loans. What we learned confirmed what we already suspected – that there is a substantial population of creditworthy people who don’t have a traditional pattern of savings.
We discussed what it would take to serve this overlooked market; to make homeownership more accessible to borrowers who have sufficient financial means but are outside the market because they don’t bank their cash, are self-employed, or work multiple jobs and their total incomes don’t fit traditional underwriting requirements. It turns out, we were not the only ones thinking along these lines.
Almost a decade after the housing crisis, many responsible potential homeowners remain locked out of the market. But in the past month there have been a pair of hopeful developments that may be key to opening doors to homeownership for qualified first-time and underserved buyers.
Fannie Mae and Freddie Mac have unboxed two long-anticipated initiatives designed to make credit more available to deserving potential buyers without compromising standards. Importantly, these are not politically driven affordable lending programs. They are targeted at qualified buyers who fall just short of the strict criteria currently being used to assess eligibility.
A TEST OF NEW INCOME SOURCES
The first of these is Freddie Mac’s new Your Path pilot program launched in September to boost mortgage originations. The program allows lenders some flexibility to include income that may not be eligible through the standard GSE programs when considering loans to first-time buyers, applicants with low-to-moderate incomes, and those who live in underserved areas. Importantly, Your Path recognizes this cohort as an overlooked market opportunity to make good loans.
The pilot is limited initially to just two lenders, specializing in low-income customers and Hispanic communities. Radian is the preferred mortgage insurer for this pilot and we will be monitoring the risk profile, underwriting quality, and early performance of these loans very closely to ensure that they are being repaid on time.
We see our role as an important backstop that will help mitigate risk and solidify trust in the program among potentially skeptical industry observers. After 12 months, Freddie Mac will analyze the results and decide whether to expand the program nationwide.
AN ANTICIPATED UPDATE FOR DESKTOP UNDERWRITER
The second promising development is the much anticipated update of Fannie Mae’s Desktop Underwriter. DU Version 10.0 adds another dimension to credit analysis by taking not just outstanding balances into account but also the borrower’s repayment performance.
By looking at repayment speed and consistency, lenders get a new perspective that helps them distinguish between a borrower carrying a large debt balance month after month, and another with the same balance who makes monthly payments. For lenders this means a more comprehensive and accurate credit evaluation. But for some, it also means adapting to the new requirements before submitting case files through DU 10.0.
The beauty of DU 10.0 is that it will automate the underwriting of loans that do not have traditional credit, which previously had to be manually underwritten – a laborious process that many lenders simply chose to avoid. Now the process is faster and less expensive with fewer opportunities for errors. For our part, non-traditional credit will now be eligible through Radian’s One Underwrite program with DU 10.0 automated underwriting. We have updated our systems to accept no FICO when there is Desktop Underwriter approval. We expect many other companies to explore ways of reaching new creditworthy borrowers through DU 10.0 and get more qualified people approved.
NEW HOPE FOR QUALIFIED HOMEBUYERS
The GSEs are working to even the playing field and put responsible mortgage borrowers in homes of their own by exploring new approaches to assessing credit. These two new programs are a result of that experimentation and they come at a critical time in the U.S. housing market.
The housing crisis and the Great Recession that followed left behind a cloud of doubt over the creditworthiness of millions of Americans. Lifting that cloud and bringing more qualified people and families into the housing market is an essential step toward rebuilding credit, restoring whole communities, and clearing the market so it can once again be the realizable American Dream.
But the decade of doldrums also raised doubts in a generation of Americans about the fundamental desirability of homeownership. Convincing the rental generation that it’s safe and smart to invest in a home and in a community will set our society on a more positive course long-term.
Academic studies have shown, and continue to show, that owning a home gives people a unique sense of pride and satisfaction, enhances their lives, deepens their commitments across the board, and makes them better and more engaged citizens.
Fannie’s and Freddie’s new programs are intended to lower the barriers to homeownership for tens of thousands of otherwise qualified buyers and expand the ranks of Americans with a stake in the future of the nation. That’s a goal worthy of the industry’s boldest creativity and most courageous experimentation. We are ready, capable, and eager to support it.
