Imagine mortgage credit standards as a roadway, connecting lenders with potential borrowers who dream of owning a home. What in the mid-2000s was a wide-open superhighway with few barriers became, after the 2008 housing crash, a one-lane path open only to the most credit-qualified.
As loan defaults multiplied and banks collapsed, lenders abruptly lost their appetite for risk and abandoned their former “if you breathe, you qualify” loan standards. The Urban Institute says lenders would have issued an additional 6.3 million mortgages between 2009 and 2015 “if lending standards had been more reasonable” — for example, like the pre-housing-crisis home loan requirements of 2001.
With such stringent loan criteria in place, homeownership rates in the U.S. fell sharply, especially for minority households, according to the Pew Research Center.
“Black and Hispanic households today are still far less likely than white households to own their own homes — 41.3% and 47%, respectively, versus 71.9% for whites — and the homeownership gap between blacks and whites has widened since 2004,” Drew DeSilver, a senior writer at Pew Research Center, wrote in a recent report.
Pew research finds that black and Hispanic home buyers have a harder time qualifying for conventional mortgages than white and Asian applicants — and when approved, are typically charged higher interest rates.
In September 2016, Fannie Mae, the government-sanctioned company that buys many of the mortgages that lenders issue, unveiled two new credit scoring initiatives in its underwriting process. Here’s what those changes may mean, especially to borrowers of color.
Trended credit data
Fannie Mae’s automated loan-underwriting system is how nearly 2,000 lenders determine whether a borrower qualifies for a mortgage. Among upgrades put in place late last year was the integration of “trended credit data.” This takes credit reporting beyond simply noting “yes” or “no” as to whether you paid a bill on time each month.
Trended data “actually takes into account the amount you pay, the level of revolving debt that you have and how that relates to your total available debt,” says Mike Mondelli, senior vice president of TransUnion’s alternative data services. It also compares the amount you paid with what the minimum due was.
It’s a 24-month snapshot of borrowers’ payment patterns. That allows lenders to better predict how borrowers might pay their bills going forward.
For example, consider two borrowers. One pays off the full balance each month or makes a payment higher than the minimum amount due. Another makes only the minimum payment due. Both pay on time, but if all else is equal, trended data might help a lender conclude that the first borrower is a lower credit risk.
Use of trended data could move “about 23 million people from a nonprime to a prime score categorization,” Mondelli says.
In 2015, more than one-quarter (27.4%) of black applicants were turned down for home loans, most commonly because of credit history issues, according to Pew research. And people with subprime scores — generally considered to be below 670 — pay higher interest rates.
Read more: Nerdwallet