Freddie Mac automating rent-based underwriting for single-family loans

Freddie Mac on Wednesday announced that it will make it possible to submit loans for automated underwriting based on 12 months of on-time rental payments starting on July 10.

The functionality will be available through the government-sponsored enterprise’s Loan Product Advisor technology. In addition to using bank information collected through third-party vendors, Freddie will accept checks and electronic payments from service providers like Venmo, PayPal and Zelle. 

The initiative builds on a program Freddie previously established with Esusu, a fintech that has ties to tennis star Serena Willliams, which facilitates the collection of more rent payment records from tenants who work with the GSE’s multifamily borrowers. Freddie’s initiative also generally matches one previously established by its competitor, Fannie Mae, which launched a rent-based single-family underwriting initiative last year.

“By factoring in a borrower’s responsible rent payment history into our automated underwriting system, we can help make home possible for more qualified renters, particularly in underserved communities,” Freddie Mac CEO Michael DeVito said in a press release.

This could help expand homeownership to first-time buyers who lack credit histories more commonly used to qualify consumers for mortgages. In turn, it could reduce reliance on traditional underwriting, which recently proved subject to risk after a coding error at Equifax impacted 12% of the credit scores calculated based on that credit bureau’s data over a few weeks in the spring.

The inclusion of positive rental payment history is also a measure intended to help fulfill new GSE goals on narrowing the racial homeownership gap.

Renters are seven times more likely than homeowners to lack enough of a payment history to generate a traditional credit score, the Urban Institute found in a study last year. In addition, well over half or 58% of Black households, which generally have been subject to the largest racial homeownership gap in the housing market (around 30 percentage points lower than for their white counterparts) are renters, according to the Urban Institute.

A growing number of private-market vendors have been working to make it possible for consumers to opt into sharing a broader range of financial data in order to qualify for loans, and traditional credit reporting companies collect more of this information.

Vendors facilitating the collection of rental data that have announced they will be reporting into the three main credit bureaus include Self Financial and Bilt Rewards. Jonathan Lawless, a former vice president at Fannie Mae, heads up Bilt’s homeownership programs.

Some, but not all, credit-building initiatives come with costs for consumers, and have drawn criticism out of concern about potential reporting of negative or inaccurate information. Freddie Mac has said its goal is to avoid such adverse impacts to consumers in working with rent-reporting companies. Esusu, for example, has said it charges property owners but not renters, and will not report negative payment information. Both Fannie and Freddie generally only work with approved vendors.

Freddie Mac has also recently expanded consumer financial information in underwriting by authorizing the use of digital bank-data verification to 10-day pre-closing employment checks. Both GSEs have been working to expand the use of information from depositors’ accounts to verify multiple data points used in underwriting single-family borrowers.