Using credit scores for rents and utility payments would dramatically expand homeownership
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
Common sense, not rocket science will go a long way to expand access to mortgage credit, thereby increasing homeownership rates.
At their annual convention held in Long Beach, this week I learned about homeownership challenges facing minority borrowers from Ronald Cooper, president of the National Association of Real Estate Brokers or NAREB. NAREB is a real estate trade organization, primarily representing minority real estate professionals.
Cooper explained that after the mortgage meltdown and Great Recession, many properties in predominantly black communities that were foreclosed upon were sold to many of the same big-time Wall Street investors who were instrumental in the earlier predatory lending practices. Cooper’s point is now there is a scarcity of product for sale where many blacks live and work and build wealth through homeownership.
The homeownership rate for blacks today is 41.7 percent, according to Cooper. That is lower than the national homeownership rate during the 1930’s Great Depression, according to a study NAREB released this week.
“Low- to moderate-income blacks are better at paying subsistence bills (rent, utilities). They use credit cards as a last resort. Only time it’s scored is when you don’t pay it,” said Cooper.
Updating credit-scoring models to include rents and utilities will not only assist African Americans but will assist all renters who want to get on the homeownership track.
FICO has a credit scoring monopoly, hard welded into Fannie’s and Freddie’s mortgage decision engines. Their regulator, the Federal Housing Finance Agency or FHFA, announced in January 2015 that it was looking into other scoring models and ideas as the old FICO model does not score rents or on-time utilities.
No law or regulation requires the use of FICO scoring. Yet in December 2015, U.S. Rep. Ed Royce co-sponsored with Terri Sewell of Alabama H.R. 4211 Credit Score Competition Act of 2015 which proposes to do what FHFA already seems to be working on. What gives?
“I don’t know the answer to that question,” said Royce when asked if he was the recipient of contributions by lobbyists from FICO scoring competitors Equifax, Transunion and Experian (Vantage Score). Royce offered that added pressure from Congress can get the right policy.
Most lenders have overlays. That is, they add additional underwriting conditions on borrowers, above and beyond the automated Fannie, Freddie, and FHA underwriting requirements.
Lenders never post their underwriting overlays to consumers up front, before application. Lenders fear loans to marginally qualified borrowers can bite them via the FHA False Claims Act and separately representations and warranties that lenders must provide for conventional loans.
Laurie Goodman, Urban Institutes co-director of housing finance policy, and Dr. Lynne Fisher, research and economics vice president at the Mortgage Bankers Association, separately explained to me that lenders must attest that each FHA loan is perfect.
If the loan goes bad, then the U.S. Justice Department may investigate. Lenders face significant financial redress under the False Claims Act. The Justice Department’s written position is they go after lenders for fraudulent acts, not honest mistakes.
It’s simple. Update credit scoring models to include rents and utilities.
Congressman Royce should sponsor a new a bill that mandates every lender must underwrite to FHA, Fannie Mae and Freddie Mac minimum underwriting standards. No overlays. No funny business.
Jeff Lazerson - Mortgage Columnist since 2011