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

Freddie Mac announced on Wednesday that it would be possible to submit loans for automated underwriting based on 12 months of one-time lease payments starting July 10.

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

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

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

This could help extend homeownership to first-time buyers who lack the credit history more commonly used to qualify consumers for mortgages. In turn, this could reduce the reliance on traditional underwriting, which has recently proven to be risky after a coding error at Equifax impacted 12% of credit scores calculated based on data from that credit bureau over a few weeks in the spring.

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

Renters are seven times more likely than homeowners to not have enough payment history to generate a traditional credit score, the Urban Institute found in a study last year. Additionally, well over half or 58% of black households, who have typically experienced the largest racial homeownership gap in the housing market (about 30 percentage points less than for their white counterparts) are tenants, according to the Urban Institute.

A growing number of private market providers are working to allow consumers to choose to share a wider range of financial data in order to qualify for loans, and traditional credit reporting companies are collecting more of this information.

Vendors facilitating rental data collection that have announced they will report to the three major credit bureaus include Self-financing and Bilt Rewards. Jonathan Lawless, former vice president of Fannie Mae, leads Bilt’s homeownership programs.

Some, but not all, credit enhancement initiatives come with costs to consumers, and have criticism drawn out of concern for potential reporting of negative feedback or inaccurate information. Freddie Mac said his goal was to avoid such negative consumer impacts by working with rental reporting companies. Esusu, for example, said it bills landlords but not tenants, and won’t report negative payment information. Fannie and Freddie generally only work with approved suppliers.

Freddie Mac also recently extended consumer financial information to underwriting by allowing the use of digital verification of bank details to Job checks 10 days before closing. The two GSEs worked to expand the use of depositor account information to verify multiple data points used in underwriting single-family borrowers.

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