Freddie Mae is considering a move similar to Fannie Mae's recent addition of rent-based mortgage credit ratings to introduce a fairer and more modernized underwriting policy.
Freddie's CEO Michael DeVito declined to make any formal announcement on the matter, but told attendees at the Mortgage Bankers Association's annual meeting in San Diego that such a move is one of the types of "cash flow underwriting" updates Freddie is considering.
"Are the credit models working the way they are intended for the people we are trying to evaluate … through that lens? I think the way credit works needs to be expanded, ”DeVito said. “[Fannie Mae CEO] Hugh's [Frater] team was at the forefront of the rental data. Of course we are there too. "
Fannie added rental data to his automated underwriting system just last month and his credit score usage rate is low. However, Frater told conference attendees that he expected this to become commonplace over the next decade.
"I predict that in 10 years' time there will be maybe five … rental dates in any or every credit rating system, down from less than 5% today," said Frater.
Rental-based credit checks, making it easier for multiple borrowers to qualify, by basing underwriting on average creditworthiness rather than the lowest, and expanding high mortgage lending eligibility, all aim to make lending more affordable and fair, he said.
While credit escalation needs to be done carefully to account for risks in the market, which include a rise in home prices, affordability concerns currently outweigh write-off risk, Frater said.
"I'm not so concerned about a downturn as I am about what it means for people trying to access a home," he said. “Prices have risen five times faster than income growth for low- and middle-income borrowers. This may help the seller and anyone who benefits from the home sale or mortgage transaction, but it is of no use to people trying to realize their dream of an affordable home. "
Home prices appear to be supported by long-term trends in household formation, DeVito noted.
"We have a generation of people who really want to be homeowners and are ready to do whatever it takes to make that happen, and that's why we think that's sustainable," he said. “That demand will be there. We don't think it'll go away. "
But even with relatively higher levels of home equity and broader loss mitigation options, the industry is likely to face a surge in foreclosures through 2022, DeVito said.
“We will do everything we can to avoid that. We certainly don't think this is the real estate crisis of the last decade. The supply-demand equation is different and house prices are in an entirely different place, but the restart of the foreclosure process, which is likely to happen later this year or early next year, is going to be bumpy because the market hasn't done so in a long time . "