In a surprise announcement on August 11th, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae, one of the two Government-Sponsored Enterprises (GSEs) involved in housing finance, will soon begin incorporating rental payments in the mortgage credit evaluation process. NTU is pleased to see FHFA take a positive and innovative approach that could help more credit-worthy Americans access homeownership without threatening the safety and soundness of the GSEs. For years, NTU has encouraged policymakers to expand the use of “alternative” data, such as rental and subsidized rental, utility, and telecommunications payments, into credit reports and scores. More data --not manipulation of how credit scoring models incorporate data -- will drive financial inclusion and expand credit access to more Americans. We commend Acting Director Thompson for spearheading this significant step forward.
According to FHFA’s press release, beginning mid-September, Fannie Mae will help lenders factor in borrowers’ history of rent payments when weighing those applicants’ qualifications. To be eligible, borrowers must meet a few criteria, such as 1) be first-time home buyers and use the property as a primary residence; 2) give permission for lenders to access their bank account information and; 3) have a monthly rental payment of at least $300. Since rental data is often not included in an individual’s credit history, Fannie Mae’s announcement could help more Credit Reporting Agencies track this information and thereby provide a credit score (the key to establishing realistic borrowing capacity) for more people. Since most individuals consistently pay rent on-time, which is typically the single largest monthly household expense, they have, before now, not been rewarded for those payments as they would for mortgage or credit card payments.
In our view, incorporating more data into the credit reporting system is a net positive that helps both lenders and borrowers. For borrowers, more information can help them receive a higher loan limit or a loan under better terms, or perhaps both. On the lender side, more data and history provides a clearer financial picture of a customer, which can help reduce the likelihood of default by a potential borrower. Research also indicates that allowing consumers to demonstrate their regular rent payments is a predictive indicator of a borrower's ability to repay financial obligations. Ultimately, taxpayers benefit when more data informs and stabilizes the housing market, within which several entities implicitly or explicitly backed by the government participate.
While NTU is supportive of Fannie Mae’s policy change, there are several refinements that policymakers should consider.
First, as currently written, the policy of including rental payment history can only work in a borrower’s favor since the data reported is solely “positive” information. Only reporting positive information runs counter to the premise of risk-based pricing. Doing so will skew the data and not provide an accurate view of a renter's ability to pay, since late, or no payment will not be reflected in the collection of that information. This means that if a borrower makes payments they are rewarded, but if they don’t there is no feedback to accurately assess a borrower’s credit. If a renter is only making some payments, it is important for lenders, and Fannie Mae, to count that in the evaluation process. Otherwise, no one is served -- borrowers get saddled with loans they can’t afford, lenders take on costs they must pass on to other homeowners, and Fannie Mae takes on risk in its portfolio that taxpayers may eventually be asked to cover.
Second, the minimum monthly rental payment of $300 is too low and should be increased. According to Bankrate.com, the average monthly mortgage payment for a homeowner in the United States is $1,275 on a 30-year fixed mortgage, more than four times the minimum payment amount that Fannie Mae requires. Just because a renter makes on-time payments of a relatively small rent doesn’t necessarily indicate they are well-qualified for mortgage payments. Certainly, this is only the minimum amount, but it would be prudent to raise the $300 floor.
One other innovation that should also be considered is the reporting of subsidized rental information to Credit Rating Agencies. At the start of this year, NTU called for the collection of this information through an act of Congress, and thankfully draft legislation by Congressman Byron Donalds (R-FL) would have HUD conduct a pilot program on the potential benefits of reporting the payment information of public housing tenants. That discussion draft builds off a highly important February 2020 study that showed “subsidized rental payment data in consumer credit files warrant further attention from policymakers.” According to this groundbreaking study, HUD notes that including subsidized rental data in credit reports “could increase the proportions of tenants with scorable credit histories and with good credit scores” and the “problem of credit invisibility and unscorability can be dramatically reduced.” Here’s hoping that more Members of Congress -- both Democrats and Republicans -- join Mr. Donalds in supporting this commonsense piece of legislation.
While it is not certain how many potential borrowers will take advantage of this change, we nevertheless applaud FHFA and Fannie Mae for such an innovative approach. Like FHFA, we believe in expanding homeownership opportunities in a manner consistent with its mission of safety and soundness, and enhanced collection of information can lead the way. We look forward to helping all policymakers expand homeownership in a manner that protects taxpayers.