The credit will be extended to families who qualify for the company’s Home Possible and HFA Advantage products. The program is scheduled to begin March 1.

“This new effort continues the progress we made in 2023 and is particularly important in today’s housing market, where elevated rates and low supply have created affordability challenges for many families,” said Sonu Mittal, head of Freddie Mac’s single-family acquisitions division, in a statement. “We look forward to announcing additional ways to support low-income borrowers in the months ahead.”

Fannie Mae announced last month a similar $2,500 loan-level price adjustment for very low-income borrowers who are purchasing a home. Fannie’s credit can also be used for downpayment and closing costs.

Freddie Mac financed about 800,000 home purchases last year. First-time homebuyers represented approximately 51% of those purchases, the highest number since the company started tracking that statistic three decades ago.

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One in five Gen Zers were having their on-time rent payments reported to the credit bureaus, according to a TransUnion survey released this past June. And 86% of the respondents in this age group reportedly saw their credit scores improve. The survey conducted in March 2023 included responses from roughly 150 property managers and 3,300 renters.

Gen Zers have their rent payments reported at double the rate of the population as a whole — 21% compared with 11%, according to the survey. Gen Z appears more financially aware and more focused on improving their credit than prior generations, says Maitri Johnson, TransUnion’s vice president of tenant and employment. “For example, other TransUnion research has found younger generations are more likely to use airline and hotel memberships and affiliated rewards credit cards to maximize their spending,” Johnson wrote in an email.

“Like 10 years ago, I remember us having conversations around how to expand credit to those with thin credit files by looking at their rent payments.”

– Kristin Messerli, co-founder and executive director, FirstHome IQ

Property managers are also increasingly likely to report rent payments, with nearly half of those who do having started in 2022. The most common reasons cited were to help tenants build their credit scores and to encourage residents to pay on time.

There are more financial literacy options today than there were for previous generations, says Kristin Messerli, co-founder and executive director of FirstHome IQ, a nonprofit that offers homeownership education. Gen Zers rely less on information from loan officers and more on financial education via social media, she says.

“I think we’ve moved away from trusting institutions and more toward trusting individuals,” Messerli says. “It’s not to say that they are trusting everyone they see on TikTok, but they’re capturing information and they’re getting information that otherwise wouldn’t have been available to them.”

On-time rent payments help younger and more diverse borrowers build credit faster, Messerli says. And this has become part of a national conversation. “We’ve been talking about this for many years,” she says. “Like 10 years ago, I remember us having conversations around how to expand credit to those with thin credit files by looking at their rent payments.”

In 2021, Fannie Mae and Freddie Mac each launched programs aimed at using rent payments in the mortgage approval decisionmaking process. Last year, all of the major credit bureaus (Experian, Equifax and TransUnion) started to include rent payments in credit reports and credit-score calculations.

“It’s difficult to say why it didn’t happen earlier, but the call to make it a standard practice has steadily built momentum over the past several years,” Johnson says. “I think the reason it gained traction so quickly is due to the fact that consumers and the financial services industry are both pushing for residents to get credit for their consistent on-time rent payments, along with other regular payments like utilities and telecommunications.”

Still, even those who are making gains on their credit scores face a tough road, says Jonathan Lawless, head of homeownership at Bilt Rewards, a loyalty points program. His company works with 40 major multifamily property owners in the U.S. and allows renters to earn rewards points for their rent payments, with no transaction fees, while building a path toward homeownership. Bilt offers a co-branded credit card as well.

There are 24 million renters in the U.S. between the ages of 30 to 44, which can be considered prime homebuying years. But there are only about 600,000 homes actively listed for sale at any given time, Lawless says. The lack of supply remains a major stumbling block even for those who are improving their credit scores.

“It basically means that unless you’re sort of in that top 10% of income earners or savers in the rental class, you really don’t have a shot at those limited number of listings,” says Lawless, who also points to affordability and wage growth challenges.

Renters tend to be younger, and a meaningful percentage don’t see more than a 10- to 15-point improvement in their credit scores via on-time rent payments, Lawless says. But it will turn credit invisibles — consumers with limited or no credit history — into credit visibles. And the major credit models consider the age of credit. The more seasoned the credit, the better the score, he says.

“It is very important to have that awareness and to start early,” Lawless says. “The first thing you do out of college might be to start renting an apartment and, boom, suddenly you’ve got a credit score.”

Credit-score improvement can thus pay dividends for those on the cusp of purchasing a home now. And it can also help younger consumers get on the right path so that when market conditions change in the future, they’ll be well positioned to buy.

“Let’s get them on the right journey,” Lawless says. “Let’s educate them. If they can’t find the right home now, keep building their credit so when they do find the right home, they’ve got the best possible chance.” ●

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Today’s reality is that evaluating an applicant based on credit alone may provide too limited a view into their actual financial situation and creditworthiness, especially for the consumers with little or no credit history. As a result, these so-called “credit invisibles” and others without a prime credit score can find it quite difficult to access credit. The scope of the issue is significant, with tens of millions of consumers having thin credit files or labeled as “credit invisible,” even though many may be gainfully employed and have income levels that otherwise make them well-qualified loan applicants.

“Fortunately, loan originators now have access to more information, beyond credit scores and DTI ratios, to help them form a more holistic view of their clients.”

Social responsibility within lending promotes equity in underwriting and helps level the playing field among consumers. It also drives deeper financial insights into applicants while bridging gaps in their financial profiles to help minimize risk. Part of the evolution of the mortgage industry to support more socially responsible lending relies on the ability of originators to access expanded types of data used to make loan decisions.

Deterred by debt

For U.S. consumers, debt can be acceptable when it provides a means to fund personal purchases like new automobiles, or to invest in education and training required to unlock new job opportunities and advance their careers. But with today’s steep housing prices and higher interest rate trends, too much debt could present a roadblock to consumers who are exploring homeownership.

Typically, lenders consider a borrower’s debt-to-income (DTI) ratio when evaluating their loan application by comparing their monthly debt payments (such as rent, credit card bills and student loans) to their monthly income.

The ideal DTI ratio to approve a conventional mortgage is 36% or less, with a higher percentage indicating that income is more constrained. This increases the likelihood of the loan having a higher interest rate or the request potentially being denied. But DTI can fluctuate throughout the mortgage process, and some industry leaders have expressed interest in finding new or additional ways to measure a borrower’s repayment ability.

Fortunately, loan originators now have access to more information, beyond credit scores and DTI ratios, to help them form a more holistic view of their clients. By leveraging alternative data (such as employment history, secondary income sources, utility bills, TV and internet bills, or mobile phone and rental-payment histories) mortgage originators can gain deeper insights into a borrower’s actual repayment ability.

More than a score

Alternative data equips loan officers and brokers with avenues to unlock a wealth of additional, relevant financial data that can reveal broader information about an applicant. Most notably, this includes their potential repayment behavior.

Leading examples of alternative data in today’s lending market include income and employment data (encompassing additional sources like part-time jobs and rental-property income); telecommunications and utility payment data; specialty finance data (e.g., rent payments or peer-to-peer payments); and education data. The augmentation of credit decisioning with alternative data helps to provide a deeper understanding of the applicant’s spending patterns and cash flow, allowing mortgage companies to make more informed lending decisions.

These new data sets can also allow consumers — especially those considered to be credit invisible or those with thin credit files — to increase their chances of securing a loan. By helping originators to expand their qualifiers for assessing creditworthiness beyond traditional credit scores, alternative data helps to extend the availability and opportunity for loans to more consumers. It also helps lenders to develop and diversify their lending opportunities.

Consider women and minorities as examples, as these consumer segments historically have had less access to credit. When loan officers categorically overlook consumers with a subprime credit score, opportunities may be lost to grow their client bases. To successfully lend in a socially responsible way, originators must begin to think of alternative data as a valuable tool to enhance and augment credit decisioning while providing a more comprehensive view of each applicant.

Value over time

Despite the wide availability of alternative data sets, as well as digital verification tools, many originators still make decisions that are primarily influenced by traditional credit scores. They dismiss insights that can provide a more detailed profile of applicants and, as a result, potentially exclude otherwise viable borrowers.

Many lenders recognize the lasting, long-term value of building borrower relationships, beyond just that of the initial mortgage. When lending to credit invisibles or borrowers with thin credit files, you can create additional loyal relationships. And for the borrowers who dutifully make their payments on time, over time, their consumer credit score becomes more established and positions them as viable prospects for additional products and services.

For many Americans, the pathway to meaningful, generational wealth often begins with homeownership. Across the mortgage industry, there is an opportunity to help more qualified borrowers gain access to this pathway. Through a more socially responsible approach to lending, mortgage companies can drive greater financial inclusion in a risk-responsible way and affect real, positive impacts in communities across the nation. ●

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Although the dynamics of America’s underserved communities are complex, one tried and true way to uplift and revitalize neighborhoods is by investing in and improving homes. Local real estate investors are often best positioned to pursue these opportunities. Their boots-on-the-ground perspective provides an ability to see the potential in a renovation project and its impact on the community.

“Building new housing stock is important, but housing supply is most needed at the lower end of the cost spectrum, in communities with little economic incentive to encourage new development.”

Let’s take a closer look at the benefits of residential real estate revitalization and how local investors can create opportunities for their own communities to flourish. Mortgage originators can be the bridge to assist investors in improving these communities.

Dividing line

Community deterioration has been well studied. Ill-intentioned public and private policies, often racially fueled, have served to extract community resources and concentrate poverty. For example, almost every distressed urban area in the U.S. has had a highway built through it at some point, quite literally creating a divide through the community, according to the nonprofit organization Purpose Built Communities.

Many of these projects specifically served to isolate and resegregate minority communities in many major cities across the country, including New York, Atlanta and Minneapolis. The effect of these actions is almost always the same: People who can afford to move away leave the area, resources and jobs follow, and the community suffers.

Residential real estate investment is a tool that, when used properly, can revive and strengthen communities. Investing in residential properties — particularly through the rehabilitation of dilapidated homes and land sites — heals communities from the inside by attracting new residents, diversifying socioeconomic demographics, and ultimately attracting jobs and community resources. This approach also has the potential to create generational wealth for the investors who are helping these communities.

Research from the Center for Community Health and Development at the University of Kansas found that improving the quality of housing increases neighborhood pride, leading to a reduction in crime, violence, vandalism and other social challenges. Residential real estate investment also encourages other types of community and commercial developments, thereby increasing city tax revenues and personal property values.

Housing disrepair

In addition to the rise in distressed communities, the nation is also suffering from a severe housing shortage. Recent research from the National Multifamily Housing Council suggests that the U.S. has a shortage of 600,000 apartment units and needs to build 4.3 million new apartments by 2035 to meet current demand.

The single-family home construction industry is nowhere close to meeting its goal either. A recent report from Realtor.com estimated that the nation has a shortfall of 6.5 million single-family homes. About 1 million single-family starts occurred in 2022, down 10.6% from the prior year.

What’s missing from these statistics is the allocation of housing. Building new housing stock is important, but housing supply is most needed at the lower end of the cost spectrum, in communities with little economic incentive to encourage new development. In these communities, functional housing obsolescence — a term used to describe homes that do not align with buyers’ needs and wants — has been on the rise for more than a decade.

Investment in existing residential properties — rather than in new developments — is a cure for this problem. Investors can breathe new life into outdated and obsolete homes. There are opportunities to repurpose unwanted housing stock and make it appealing to a new generation of homeowners. This type of residential investment actually increases supply and provides relief to the housing shortage at the lowest end of the cost spectrum.

So, why don’t more older existing homes attract investment? There’s not one simple answer, but one common challenge is that local investors often lack access to capital.

Meaningful change

The biggest challenge to supporting residential investment in underserved communities isn’t a lack of opportunity or desire — it is a lack of capital. Local investors may have the capability and inclination to invest in residential housing projects that could catalyze community growth and development, but they often don’t have the means to fund these projects.

National and regional banks are typically too risk averse to fund residential revitalization loans. Local investors don’t have the same access to the capital markets as large institutions. The good news is, capital is out there, but it might not be available through a local bank branch. Technology-enabled private lenders are filling the funding gap and democratizing investment capital for small and scaling investors.

Using a robust pool of data that focuses on the subject property and housing demand, rather than the singular credit of the borrower, makes it possible to underwrite properties and borrowers in a way that removes the traditional barriers to securing investment capital. A faster and more transparent application process means that borrowers who might not otherwise be able to secure a loan can pursue their goal of investing in real estate — and revitalize their communities while doing so.

Technology-enabled lenders are also diversifying investor pools and offering residents of the same neighborhoods that need revitalization an opportunity to build wealth. These loans have a meaningful impact on borrowers’ lives by creating opportunities that traditionally have only been available to a select segment of the market. For many prospective real estate investors, the ability to access capital and pursue promising career opportunities can be life changing.

It is clear that reserving capital exclusively for established investors is not a solution to the current housing crisis. Investment in residential real estate has the potential to truly address some of the nation’s deepest problems. By improving access to capital through technology and data-enabled lending, a new generation of real estate investors can pursue opportunities that create meaningful change for themselves and their communities — one property at a time. ●

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But homeownership is not equal across racial groups in America. A Treasury report published this past November found that racial homeownership gaps have changed very little in the past 50 years. The report stated that the homeownership gap between white and Black households was the same in 2020 as it was in 1970. In second-quarter 2022, the homeownership rate for white households was 75% compared to 45% for Black households, 48% for Hispanic households and 57% for households of other races.

Fair lending practices were historically problematic, but they have improved since the Great Recession, according to the Treasury report. Recent research published in The Review of Financial Studies found no evidence of widespread discrimination in mortgage interest rates charged to consumers by race or ethnicity.

“The biggest way to move the needle on multicultural originations is moving from selling to social impact lending.”

– J. Tony Thompson III, CEO, National Association of Minority Mortgage Bankers of America

This is a nuanced topic, and racial homeownership gaps exist in part because of overall wealth gaps and disparities in access to credit among racial groups. But as communities of color grow in population, education and wealth, mortgage industry leaders are encouraging lenders and originators to consciously expand their business efforts to minority groups.

The borrowers of the future are millennials, single women and communities of color, says J. Tony Thompson III, founder and CEO of the National Association of Minority Mortgage Bankers of America (NAMMBA). Over the next five years, he says there is a $2.9 trillion purchase loan opportunity in the multicultural market, so NAMMBA is encouraging mortgage companies to lean into what the organization calls “social impact lending.”

“Lenders need to understand that the biggest way to move the needle on multicultural originations is moving from selling to social impact lending,” Thompson says. “Social impact lending is understanding the needs of the marketplace first and the communities that you serve.”

A key part of social impact lending, he says, is “doing good by doing good.” Mortgage professionals should aim to engage and educate future borrowers who may be distrustful of lenders. These are often first-generation buyers whose parents were renters, or they may have had an experience that led to distrust. “The buyers today are the kids who saw their parents get foreclosed on 12 years ago in the Great Recession,” Thompson says.

To engage in social impact lending, Thompson says mortgage professionals will need to deploy better outreach strategies. This includes changes to their marketing strategies to connect more often and via different channels — e.g., YouTube, Instagram, TikTok or blogs — to establish themselves as a trusted adviser to their communities.

Certain sectors of the multicultural market are growing at present. According to the 2021 State of Hispanic Homeownership Report from the National Association of Hispanic Real Estate Professionals (NAHREP), the Hispanic homeownership rate grew steadily over the prior seven years. And the number of Hispanic households that own their home more than doubled over the past two decades, from 4.2 million in 2000 to 8.8 million in 2021.

Marc Hernandez, a longtime NAHREP member and president of Alterra Home Loans, says that the reasons for growth in Hispanic homeownership are twofold. For one, the total Hispanic population in the U.S. has grown, and by extension the number of Hispanic homebuyers has increased. Second and most importantly, Hernandez says the number of Hispanic mortgage professionals (loan originators, processors, closers and others) has grown, which has a huge impact on Hispanic communities.

“You have to specifically target Hispanic consumers if you want to be in the Hispanic market,” he says. “Doing that requires a cultural competency, an understanding of the cultural nuances. The best way to do that is to bring in new mortgage professionals from communities of color.”

To be most successful when working with Hispanic homebuyers, Hernandez says, it’s important to understand how their economic situations fit into the traditional credit box and federal lending agency guidelines. “You have to be creative in how you take a potential borrower with six sources of income — we all know they have the capacity to repay the loan,” Hernandez says. “It’s how you put that together and package it that matters. That is the biggest challenge, but those who do it well are the most successful Hispanic loan officers in the country.”

While understanding the traditional credit box is important, Hernandez believes that the box needs to expand to accommodate more inclusive lending. “I want to highlight pushing the traditional credit box, having Fannie and Freddie understand that they need to become more flexible in their affordable lending,” he says. “We participate in the special purpose credit programs and it’s a great first step, but I think in their legal obligation of duty to serve, they have more to do.” ●

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From February 2020 to January 2023, Black homeowners saw their home values grow by 42.5%, equivalent to nearly $84,000 in equity on average. That’s higher than the increase of 38.2% for all U.S. home values. Hispanic, white and Asian homeowners saw their home values increase by 37.8%, 38.3% and 37%, respectively.

African Americans also made moderate gains in their homeownership rate, despite disproportionate employment and income losses during the COVID-19 crisis.

“These gains are extremely important in terms of increasing wealth among the Black community, as homeowners of color are more likely to have the bulk of their household wealth tied up in their homes,” said Nicole Bachaud, senior economist at Zillow. “Due to years of redlining and other forms of systemic discrimination, housing disparities between Black and white families persist. Policies and interventions like expanding access to credit, building more affordable homes and finding new approaches to mitigate appraisal bias are keys to achieving housing equity.”

Such practices have actually been helping to boost home value appreciation since before the pandemic, as appreciation for Black homeowners has exceeded that of other racial demographics since 2014. But this trend picked up even more steam at the start of the pandemic, further narrowing the home value gap.

Consider that in February 2020, the typical Black-owned home was worth 17.3% less than the typical U.S. home. In January 2023, that gap had shrunk to 14.8%, the smallest it’s been since at least 2000.

Diving deeper, Zillow evaluated the 50 largest metros in the country, finding that the home value gap has narrowed the most since February 2020 in Detroit. The Motor City has seen 9 percentage points sliced from the Black home value gap, followed by four other Midwestern cities: Kansas City, Missouri (-8 percentage points); Chicago (-6.9); Cleveland (-5.8); and Milwaukee (-5.7).

Meanwhile, even as the homeownership gap between Black and white families remains large, it has narrowed slightly as well. In 2021 (the most recent available data from the U.S. Census Bureau), 44% of Black households owned homes, compared to 73.3% of white households. But from 2019 to 2021, Black homeownership grew by 2 percentage points, compared to 1.3% overall.

Zillow’s analysis was performed using its own data as well as data from the Home Mortgage Disclosure Act.

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Financial wariness

Clear communication

Community advocates

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If there’s one point that Bell wants to get across, it’s that VA loans offer remarkable benefits for veterans. “If you’re not making a VA loan to a veteran that qualifies, you’re costing them money,” Bell said. “If you’re a lender, why aren’t you offering it? Because we still see that it’s the best product out there for our vets.”

We know that rising rates don’t necessarily kill the market. Rising rates with declining appreciation, that could cause issues.

How is the cooling market affecting VA loan borrowers?

Why did the numbers decline?

That changed?

Do you think this trend will continue?

Can you talk about the efforts to modernize the VA loan process?

The modernization efforts aren’t on the front end with borrowers, but the back end with lenders and the secondary markets?

What are the issues surrounding the restoration of entitlement through refinancing?

When do you foresee the VA potentially getting an automated underwriting system?

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The fact is, LGBTQ, Black and other minority communities are often on the receiving end of discriminatory practices that are subtle but highly effective.

Continued adversity

Every sector of the housing industry, from real estate agents to mortgage originators, lenders and servicers, will need to learn how to better serve these communities — and learn it fast.

Legislative legacy

Discriminatory practices

Path forward

Concrete steps

The post Spectrum of Opportunity appeared first on Scotsman Guide.

Many news stories tend to focus on the potential for an individual appraiser delivering a too-low estimate based on factors associated with the occupants instead of the home. But the reality is more nuanced.

Nuanced reality

The appraiser profession needs greater diversity, allowing those involved in the process to reflect the diverse communities they serve.

Regulatory scrutiny

Troubling research

Collaborative solutions

Technological advances

Greater diversity

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