How Mortgage Lenders Can Unlock Data and Help Close the Housing Gap

Homeownership is arguably the most important driver of generational wealth in America.

Local lenders must be empowered to use their data

However, in the face of further economic uncertainty, it is now far from guaranteed for the current generation of buyers. Millennials are the largest homebuyer demographic, but have the lowest homeownership rate of any generation.

There’s still a hangover from the financial crisis of the late 2000s and mortgage credit remains tight, and now a borrower’s credit rating is one of their biggest obstacles to getting a loan. a home loan.

A large number of Americans are considered “invisible credit”, which means that their credit history is thin or non-existent. If lenders continue to rely on the same data risk assessments used 20 years ago, the chances of borrowers being denied a mortgage will only increase.

Expanding the Credit Union to Defend the Underbanked

As housing supply begins to rise again in the face of rising mortgage rates, competition for housing remains intense. Quick access to capital is more than ever a priority for buyers. Yet in 2020, 70% of approved mortgages went to borrowers with a credit score of at least 760. This trend continues to push more people out of the market, especially young first-time buyers. home that traditionally have low or no credit, despite a strong income and payment history.

In this environment, it is critical that we broaden the definition of risk-worthy credit to assess other factors strongly correlated to repayment capacity, which may lie outside of traditional credit scoring methodology. For example, an individual or family with consistent income and labor force participation from year to year, as well as on-time rent payments and a low debt burden, should be given more consideration. account.

Small and medium-sized lenders originate more than 40% of all home loans in the United States, and community banks are the only banking presence in one in five U.S. counties according to Brookings, providing millions of people access to essential financial services. By leveraging their own assets, these local lenders have the power to create more inclusive lending products than larger competitors. These offerings can meet a wider range of borrower requirements, better reflect the needs of local communities, and reach underserved segments of the market.

Local lenders also tend to offer a wide range of loans specifically tailored to demographic niches, such as military and rural populations. The Willamette Valley Bank, for example, offers FHA, USDA, and VA loans, as well as other specialty “portfolio” loans. Offering specialty mortgages means these local lenders tend to approve more borrowers than their larger competitors, even for applicants with less than perfect credit.

Data from the Home Mortgage Disclosure Act (HMDA) shows that smaller banks declined mortgage applications at less than half the rate of large banks (7.4% vs. 17.2%). Of these applications, only 2.6% were denied due to credit, again less than half the rate (5.7%) at the big banks.

Empower local lenders

The homeownership rate in the United States has been steadily under pressure since the arrival of the Boomer generation on the market and is expected to decline further by 2040, according to the Urban Institute. This will only exacerbate existing wealth inequalities in the market for homebuyers who already face significant barriers to entry.

Local lenders have the connections, financial flexibility and data to not only unlock, but transform market access for a wider range of borrower needs. By leveraging their own data insights associated with long-standing customer relationships, local lenders can establish a better understanding of borrower profiles and financial realities.

Yet 32% of small and medium-sized lenders say that fixing inaccuracies, inconsistencies and duplicates in borrower data is one of the biggest challenges they face this year. Harnessing this knowledge properly will allow lenders to then create better, more creative and inclusive mortgage products and serve a whole new segment of the market.

It’s also important for lenders to identify the parts of their existing mortgage process that create rather than remove barriers for borrowers. For example, low-income borrowers may have more complex sources of income from multiple jobs, including 1099 income.

The technology can support the aggregation and consolidation of a borrower’s full income picture before the loan is submitted for underwriting. By leveraging their technology, lenders can inject transparency, fairness, and efficiency into the entire mortgage process.

Similarly, better technology can support more robust HMDA reporting, enabling significantly better policymaking in Washington DC. Under the HMDA, mortgage lenders are required to publicly disclose loan-level mortgage information. However, since their enactment in 1975, HMDA-related questions have elicited low response rates, as many borrowers do not believe their responses will be treated fairly or may increase their chances of being denied a loan. Without access to this valuable data insights, policy decisions are made on more limited data sets, which may not provide a complete picture of the market.

From lower closing costs to reframed credit expectations, local lenders are breaking down common barriers to access. However, to help further improve the pathway to homeownership for underserved communities across the country, local lenders must be empowered to leverage their data and expand their reach to build trusted relationships with groups. more diverse homebuyers.

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