By Robert L. Cain, Copyright 2021 Cain Publications, Inc.
As evictions begin in earnest with delinquent renters looking for a new place to live, Fannie Mae (the organization that underwrites mortgage loans for millions of people around the country) is making it easier for renters to buy a home. Of course, renters with an eviction aren’t likely to be candidates for Fannie’s new program, but who will be, and will those candidacies make any difference at all for landlords losing maybe their best tenants?
Fannie’s program, beginning Sept 18, will allow Desktop Underwriting using rental payment history to boost the credit-worthiness of prospective home buyers. A buyer with spotty or limited credit can improve chances of qualifying for a mortgage loan by adding a year’s worth of on-time rent payments
Sounds good, but looking even a couple of inches deeper, it doesn’t look like rental owners are in any danger of losing some of their best tenants. troublesome questions temper what might appear to be a worthwhile program. We’ll look at those in a minute.
Some one in five Americans have little established credit history. That’s all Americans. Black and Hispanic consumers skew the numbers with almost three in ten of them falling into the little-credit category. But they pay their rent consistently. This new underwriting program is supposed to improve their eligibility by making 17 percent more people eligible for loan approvals, the number that Fannie suggests would have qualified had this new program been in place in the past.
Fannie estimates that fewer than 5 percent of landlords report renters’ payments on credit reports. Fannie’s underwriters will be able to access, with applicants’ permission, bank records to prove consistent rent payment.
Pertinent factors go unnoticed in the hoopla surrounding the introduction of this program.
First, these first-time home buyers will likely be looking to buy affordable housing. Problem is, it simply doesn’t exist now. Prospective home buyers search in vain for any housing much less what they can afford. They hesitate to give up their present home because there’s no guarantee they can find any new home to move into, much less afford. Precise figures for the lack of affordable housing are difficult to come by, but homes to buy get gobbled up by more qualified buyers competing with each other and running up the prices. Taylor Morrison Home Corporation CEO Cheryl Palmer was quoted on CNBC on July 7 of this year “We are at multiyear lows as far as new and resale inventory, and, honestly, it’s going to be very difficult for us to make up the shortage, the deficit that we’ve been building up for more than a decade now.”
It’s all well and good to make financing available to people who might not otherwise be able to get a mortgage, but the point is moot if there’s nothing to buy.
Second, there’s the pesky issue of the FICO score. The minimum score a lender will even consider is 620. Lenders can take into consideration consistent rental payments, but that 620 score just won’t go away for an applicant with a lower score. Rental history won’t make any difference. Fannie’s underwriting standards state specifically, “DU currently uses credit scores to ensure compliance with the 620 minimum representative credit score requirement.” The reason for the Desktop Underwriting program is to beef up a lack of credit, not improve the credit score. In fact, Fannie even admits that in their news release about the program. Hugh Frater, CEO of Fannie Mae writes, “there is no way it can hurt their credit score, and it will only be used to help eligible home buyers qualify for mortgage credit. Any records of missed or inconsistent rent payments identified in the bank account data (and not already reflected on the applicant’s credit report) won’t negatively affect their ability to qualify.” By the same token, if it can’t hurt their credit score, it can’t help it, either.
FICO scores, as we know, are based on several factors, half of which gauge credit and payment history. If credit is so spotty or score is so low that it negatively affects eligibility, all the rental payment history in the world won’t help a marginal buyer qualify.
The obvious question arises as to why Fannie instituted this program. If few, if any, homes are available to buy for any qualified buyer, and if the minimum FICO score will eliminate many borrowers who have limited credit, what’s the point in adding a new set of applicants, getting people’s hopes up, and then dashing them with current conditions?
Part of it may be Fannie’s stock price. It’s most recent close was about one dollar a share, that’s down from its all-time high of $85.03 on April 1, 2000, and its more recent high of $2.42 on June 10, 2021. They apparently live in hope because after the announcement of this new program on August 11, the stock dropped to $1.17 a share. Fannie Mae declined to comment about the reason for introducing the program right now. Even so, the in-the-tank stock price is a suspiciously contributing factor.
Rental owners are in little danger of losing some of their best tenants, the ones who diligently pay the rent, who have excellent landlord references, and who have steady jobs. Meanwhile, Fannie Mae has created a program that is good PR, but mostly show.