Freddie Mac's two-pronged approach is "a game changer"
Home price appreciation alongside the prospect of a recession can only add to the woes of renters hoping to enter the housing market.
With house prices having shot up by as much as 20% in some markets over the past year, and with rising interest rates adding to the anxiety, the news that the housing market is cooling down will provide scant relief for millions of people who have never owned a home.
According to recent Census Bureau figures, there are nearly 44 million people who are renters in the US. Renter-occupied units made up 30.6% of the housing inventory in the first quarter 2022. Renters are also disproportionately from traditionally underserved populations, including Black and Hispanic Americans, making the lack of rent-reporting a contributor to the homeownership gap.
“Far too many renters do not see their on-time rent payments reflected in their credit reports, limiting their ability to build credit over time,” said Corey Aber, vice president of Multifamily mission, policy & strategy for Freddie Mac.
Building visible credit
Monthly housing payments are typically the largest monthly expense households face, but unlike homeowners that pay a mortgage, renters do not see a benefit in their credit files even when they pay rent on time, month after month and year after year.
To help renters build their credit and boost credit scores, last year Freddie Mac launched a program to encourage operators of Freddie Mac-financed multifamily properties to report on-time rental payments to the three major credit bureaus.
Since Freddie Mac began this initiative last year, more than 98,000 households across 948 multifamily properties have enrolled. More than 19,300 new credit scores have been established and almost 70% of renters with an existing credit score saw their scores increase.
“Ensuring that on-time rents are reported to the credit bureaus has been a long-term challenge—it hasn’t been an industry standard,” noted Aber. “Freddie Mac has found a creative solution that can facilitate reporting at a low cost that isn’t passed on to renters.”
Freddie Mac is providing incentives to encourage landlords to report rent payment history information. For renters, rent reporting will look essentially like a loan that they have been paying on time for however many years they’ve been renting. Rent payments are then visible credit history on a loan application.
Accounting for on-time rent payments not in credit reports
The Virginia-based government sponsored enterprise (GSE) recently went one step further. In July, it enhanced its automated underwriting system (AUS), Loan Product Advisor® (LPASM), to include a borrower’s rent payment history in its credit risk assessment – even when it’s not reflected on the borrower’s credit report.
The enhancement focuses on first-time homebuyers with rent payment history documented by direct payments on their bank statements.
Jodi Eberhardt, strategic integration director for Freddie Mac Single-Family, stressed that the strategy includes reaching out to and training lenders to identify applicants who will benefit from LPA’s latest enhancement.
“We help lenders identify these loans through reporting. The lender can then help their loan officer in coaching these applicants through the process.”
In addition, LPA returns a feedback message to alert lenders of the opportunity.
LPA returns a feedback message when a positive rent payment history might help the credit risk assessment. When a lender sees the message, a Caution loan - which is unlikely to comply with Freddie Mac’s eligibility and underwriting requirements - flips to an Accept in about 7 out of 10 cases, if two conditions are met:
- A borrower provides banking accounts they have paid rent from consistently over the past 12 months.
- The submitted rent amount is aligned with the most recent rent payment debited from the borrower’s account.
“The strides made by our Multifamily colleagues and our recent enhancement to LPA help provide a new path to homeownership by improving a responsible consumer’s credit and providing an opportunity to acknowledge and use their on-time payments even when they’re not included in their credit,” said Eberhardt. “This is a game changer for the industry and could potentially change the trajectory of a consumer’s future for generations to come.”
Freddie Mac’s two-pronged approach is just another way it’s helping to make homeownership a reality for more traditionally underserved populations and create a more equitable housing ecosystem.