How digital rent reporting can build ties with future homebuyers
January 18, 2023 10:00 AM
The time seems ripe for using rent reporting to reach the next generation of homebuyers, but it's more a seed to plant now and see bear fruit later.
Several current trends have combined to give the strategy momentum, including an urgent need to grow purchase volume, increased use of consumer-authorized digital banking information, evolution in underwriting and credit scoring and the proliferation of credit-building and rent services fintechs.
But given that the near-term finances for many mortgage companies have been under duress, making a long-term investment in rent reporting is not for everyone. While a strategy that might not have an immediate payoff can for many reasons seem unappealing at this juncture, rent reporting does have a value proposition that's worth experimenting with for those that can swing it.
"To me, the concept of getting rent data is very important and powerful. How we get it is probably where the debate is," said David Battany, executive vice president, capital markets at Guild Mortgage.
Several current trends have combined to give the strategy momentum, including an urgent need to grow purchase volume, increased use of consumer-authorized digital banking information, evolution in underwriting and credit scoring and the proliferation of credit-building and rent services fintechs.
But given that the near-term finances for many mortgage companies have been under duress, making a long-term investment in rent reporting is not for everyone. While a strategy that might not have an immediate payoff can for many reasons seem unappealing at this juncture, rent reporting does have a value proposition that's worth experimenting with for those that can swing it.
"To me, the concept of getting rent data is very important and powerful. How we get it is probably where the debate is," said David Battany, executive vice president, capital markets at Guild Mortgage.
Rent reporting’s promise
To understand the importance of rent reporting and cash-flow, consider the trouble Wemimo Abbey says his family had borrowing money from a bank in the United States after emigrating from Nigeria.
Due to a lack of credit history, his mother was turned down. The inability to access the mainstream banking system forced the family to instead take out a high-rate personal loan instead, setting back their wealth-building efforts.
That's among the reasons why Abbey and his colleague, Samir Goel, co-foundedEsusu , one of a group of fintechs and "rent techs " active in the sector.
"Where you come from, the color of your skin and particularly, your financial identity, should never determine where you end up," Abbey said.
Goel, whose family emigrated from India, said he had a similar experience, seeing his parents navigate limited options for banking and shelter because they lacked the credit history needed to get more mainstream loans with lower rates.
"The thought I was left with was that it just shouldn't be so hard for people that are putting their best foot forward every day to have that opportunity," said Goel.
The ability to see that tenants fulfilled their rent obligations can improve the typically more credit-based payment track records that lenders use to determine who qualifies for financing and at what price.
"We definitely see people going from invisible to visible, and we see people that have decent average scores get better scores, up to 60 points of improvement," said Jonathan Lawless, director of homeownership atBilt Rewards , another fintech that helps people establish credit.
A growing group of startups have increasingly worked to get landlords engaged and to facilitate the transfer of data to the credit bureaus, who confirm it makes a measurable difference for scores.
"Unscorable is the cohort in which we see the greatest, most dramatic effect," said Maitri Johnson, vice president of tenant and employment screening at TransUnion, noting that in some cases they can go from being credit invisible to a 657 score after several months of rent reporting. People with subprime credit scores also can see incremental gains over time, Johnson said.
Research suggests that making a greater number of people credit visible would allow lenders to connect to the future homebuyers they want to reach and help to fulfill the Biden administration's aims to address systemic barriers to racial equity in homeownership.
"In 2021, millennials with an annual income of more than $50,000 submitted 39% of all rental apartment applications," noted John Paasonen, co-founder and CEO of mortgage technology vendor Maxwell. "That cohort represents a substantial opportunity for lenders, and rent reporting could provide a viable tool to discern which renters are positioned to qualify for mortgage loans."
Due to a lack of credit history, his mother was turned down. The inability to access the mainstream banking system forced the family to instead take out a high-rate personal loan instead, setting back their wealth-building efforts.
That's among the reasons why Abbey and his colleague, Samir Goel, co-founded
"Where you come from, the color of your skin and particularly, your financial identity, should never determine where you end up," Abbey said.
Goel, whose family emigrated from India, said he had a similar experience, seeing his parents navigate limited options for banking and shelter because they lacked the credit history needed to get more mainstream loans with lower rates.
"The thought I was left with was that it just shouldn't be so hard for people that are putting their best foot forward every day to have that opportunity," said Goel.
The ability to see that tenants fulfilled their rent obligations can improve the typically more credit-based payment track records that lenders use to determine who qualifies for financing and at what price.
"We definitely see people going from invisible to visible, and we see people that have decent average scores get better scores, up to 60 points of improvement," said Jonathan Lawless, director of homeownership at
A growing group of startups have increasingly worked to get landlords engaged and to facilitate the transfer of data to the credit bureaus, who confirm it makes a measurable difference for scores.
"Unscorable is the cohort in which we see the greatest, most dramatic effect," said Maitri Johnson, vice president of tenant and employment screening at TransUnion, noting that in some cases they can go from being credit invisible to a 657 score after several months of rent reporting. People with subprime credit scores also can see incremental gains over time, Johnson said.
Research suggests that making a greater number of people credit visible would allow lenders to connect to the future homebuyers they want to reach and help to fulfill the Biden administration's aims to address systemic barriers to racial equity in homeownership.
"In 2021, millennials with an annual income of more than $50,000 submitted 39% of all rental apartment applications," noted John Paasonen, co-founder and CEO of mortgage technology vendor Maxwell. "That cohort represents a substantial opportunity for lenders, and rent reporting could provide a viable tool to discern which renters are positioned to qualify for mortgage loans."
Why it’ll take time
Rent reporting needs to be approached as a long-term prospect because it is far from being universally embraced by landlords, and even if it was, the mortgage industry's automated underwriting infrastructure isn't fully set up for regular use of it yet.
Fannie Mae and Freddie Mac , the two government-related investors that buy a large chunk of the loans in the mainstream single-family mortgage market, recently put some exception processes in place to accommodate rent reporting in underwriting, but it's not yet mainstream.
Their underwriting systems use the Classic FICO score, which doesn't include rent reporting. While Fannie, Freddie and their regulator, the Federal Housing Finance Agency, plan toaccommodate an advanced FICO and VantageScore , they haven't yet.
And the Federal Housing Administration, which has underwriting that generally encompasses a wider range of borrowers than Fannie and Freddie, tends to be slower in updating the automation in their own systems.
There are exception processes for making mortgages based on rent reporting in both markets and they have been improved over time, but they still have limitations. They've done more for borrowers with thin credit files than those who have lacked traditional histories and scores to date.
Secondary market pricing has been one challenge, according toa recent report by the Urban Institute, which noted that it stems from the GSEs' capital requirements and the fact that negative adjustments are made for lower or nonexistent scores. That makes those loans uneconomical for many lenders, particularly small shops.
The FHFA's recent move towaive certain adverse pricing adjustments tied to a lack of sufficient credit history for certain first-time home buyers has helped. However, the new allowances do not extend to all loans or to the private mortgage insurance many first-time buyers must get, the institute noted.
Rent reporting is working its way into modernized scores the GSEs will eventually use. One credit bureau, TransUnion, finds momentum is building to bring more landlords on board to meetparticular demand from Gen Z. Among landlords aware of the practice, the share actually engaging in it rose to 27% from 17% between 2019 and 2022.
The rent reporting is said to help incentivize renters to be more reliable payers. However, the number of landlords involved is still relatively low and many are mom-and-pop operations that are difficult to reach.
"To me, the more efficient way to do it is electronic bank data," said Battany.
Their underwriting systems use the Classic FICO score, which doesn't include rent reporting. While Fannie, Freddie and their regulator, the Federal Housing Finance Agency, plan to
And the Federal Housing Administration, which has underwriting that generally encompasses a wider range of borrowers than Fannie and Freddie, tends to be slower in updating the automation in their own systems.
There are exception processes for making mortgages based on rent reporting in both markets and they have been improved over time, but they still have limitations. They've done more for borrowers with thin credit files than those who have lacked traditional histories and scores to date.
Secondary market pricing has been one challenge, according to
The FHFA's recent move to
Rent reporting is working its way into modernized scores the GSEs will eventually use. One credit bureau, TransUnion, finds momentum is building to bring more landlords on board to meet
The rent reporting is said to help incentivize renters to be more reliable payers. However, the number of landlords involved is still relatively low and many are mom-and-pop operations that are difficult to reach.
"To me, the more efficient way to do it is electronic bank data," said Battany.
What can be done now
Fannie and Freddie have been introducing rent reporting into single-family underwriting while their multifamily divisions simultaneously try to get more landlord borrowers on board and to get the reporting to the credit bureaus.
Attacking the issue from both sides is important. As Abbey's story illustrates, people who need to establish credit and have limited resources may not find it easy to do business with a typical bank. Also, a landlord's records may be more directly verifiable and potentially consistent.
In the near term, digital bank data's the lowest hanging fruit for the GSEs and lenders.
The fact that first-time buyers can now be automatically processed through systems like Fannie Mae's Desktop Underwriter has expanded the number of people that can qualify, according to Stacey Shifman, vice president of consumer credit analytics at Fannie Mae.
Rent has long been considered manually, but only in roughly the past year has the GSE's automated underwriting system identified applications that could benefit from the addition of rent reporting to lenders. Either consumer-authorized digital bank data or credit bureau information containing rent histories can be submitted, but most often it is the former that is available and used.
"Through September 2022, we've seen approximately 3,000 mortgage applications that have benefited from the positive rent payment history enhancement in DU, and of those, 50% of the borrowers identified as a person of color. Even more specifically, 40% identified as Black or Latino," Shifman said.
These two racial groups, which have been chronically underserved by the housing market, are significant to mortgage companies both due to rules around equity in lending and because they're increasingly prominent in younger generations.
While that's helped thin-file credit customers more than those lacking a score, cash-flow underwriting the GSEs have added is doing more to help the latter population. This has just gotten underway at Fannie, and while it's based on a more comprehensive view of the consumer's overall financials rather than just rent, tenant obligations can be a key part of it.
Still, the only hope for some first-time buyers who need rent reporting to qualify is the FHA market, which has broader underwriting criteria and offers more pricing flexibility than than the Fannie and Freddie market does, said Battany, noting that Guild has experimented with such loans.
While the price of mortgages with unscorable borrowers is generally unfavorable, Guild has chosen not to necessarily follow the market in its experiment with some FHA loans made to "credit invisibles" who have favorable rent reporting or cash-flow underwriting data.
"If they have no FICO, they could have as low as a zero fee depending if they have a good residual income history and or a good rent payment history," Battany said. "But the underwriting process is still technically a manual process, so to me, it's a baby step."
Attacking the issue from both sides is important. As Abbey's story illustrates, people who need to establish credit and have limited resources may not find it easy to do business with a typical bank. Also, a landlord's records may be more directly verifiable and potentially consistent.
In the near term, digital bank data's the lowest hanging fruit for the GSEs and lenders.
The fact that first-time buyers can now be automatically processed through systems like Fannie Mae's Desktop Underwriter has expanded the number of people that can qualify, according to Stacey Shifman, vice president of consumer credit analytics at Fannie Mae.
Rent has long been considered manually, but only in roughly the past year has the GSE's automated underwriting system identified applications that could benefit from the addition of rent reporting to lenders. Either consumer-authorized digital bank data or credit bureau information containing rent histories can be submitted, but most often it is the former that is available and used.
"Through September 2022, we've seen approximately 3,000 mortgage applications that have benefited from the positive rent payment history enhancement in DU, and of those, 50% of the borrowers identified as a person of color. Even more specifically, 40% identified as Black or Latino," Shifman said.
These two racial groups, which have been chronically underserved by the housing market, are significant to mortgage companies both due to rules around equity in lending and because they're increasingly prominent in younger generations.
While that's helped thin-file credit customers more than those lacking a score, cash-flow underwriting the GSEs have added is doing more to help the latter population. This has just gotten underway at Fannie, and while it's based on a more comprehensive view of the consumer's overall financials rather than just rent, tenant obligations can be a key part of it.
Still, the only hope for some first-time buyers who need rent reporting to qualify is the FHA market, which has broader underwriting criteria and offers more pricing flexibility than than the Fannie and Freddie market does, said Battany, noting that Guild has experimented with such loans.
While the price of mortgages with unscorable borrowers is generally unfavorable, Guild has chosen not to necessarily follow the market in its experiment with some FHA loans made to "credit invisibles" who have favorable rent reporting or cash-flow underwriting data.
"If they have no FICO, they could have as low as a zero fee depending if they have a good residual income history and or a good rent payment history," Battany said. "But the underwriting process is still technically a manual process, so to me, it's a baby step."
Staying on the right path
But rent reporting does have some potential pitfalls.
While current limits to rent reporting can evoke some frustration, they may be preferable to thenegative reporting that could result if efforts to require its use were to become widespread, according to the National Consumer Law Center.
Negative rent reporting is considered a problem because the point is to not penalize people for their affordability constraints. Even the most reliable of them may be a little late on a payment once in a while when the thin financial cushion they have gets obliterated by hardship. The GSEs don't allow negative rent reporting for that reason.
Fintechs facilitating the collection of rent information also generally mitigate this concern in some way, be it offering a 0% loan to bridge a one-month gap, counting that payments were made but not necessarily when, or unenrolling customers who can't pay from reporting and the benefits associated with it, rather than adding a negative track record.
"We believe that there's enough negative incentives out there. What you need is to change behavior with positive incentives. So we only report positive rental payments, and the psychology backs us up. Negative incentives don't change behavior in any significant numbers," said Rowland Hobbs, co-founder and CEO of Stake.
Another way rent reporting could go wrong, at least from the perspective of some lenders, is by becoming so ubiquitous that the bureaus use it as another form of trigger lead.
The bureaus sell these leads to outside lenders when a borrower has pulled credit to work with a mortgage company. Some stakeholders in the housing finance industry have been pressing for legislation to restrict the practice through something like an opt-in approach so the consumers they work with aren't peppered with inquiries, while the credit bureaus have argued the practice encourages consumer choice. Lenders may prefer to use rent reporting as "more of an education tool versus a lead sourcing tool," said Nick Rozek, a loan officer at Embrace Home Loans.
But lenders concerned about its potential use for widespread lead generation may not have to worry about it because so many of the factors that go into renter decisions about whether to buy are subjective. That makes it challenging to quantitatively model their influence on consumer behavior in a programmatic way.
For example: Looking solely at the current high costs of both ownership vs. renting based on monthly payment size, the latter generally looks more attractive, which might suggest little conversion would occur. However, for owners with plans for longer homeownership tenures, the economics could look relatively better. Factors like whether the loan has a fixed rate or not, and other costs and priorities residents have, also come into play in decisions about whether owning is preferable.
"I think it's too much information for anyone to be able to definitively say, here's probably what's going to happen," said Jacob Channel, senior economist at LendingTree.
Ultimately the best approach to reaching the next generation of borrowers through rent reporting may be to make it part of the conversation or messaging with anyone applicable who shows an interest in learning what it takes to become a first-time buyer.
"It's a good tool if you're helping someone and you're advising them on the steps you need to take to become a homeowner," said Bill Rozek, a senior loan officer at Embrace Home Loans.
While current limits to rent reporting can evoke some frustration, they may be preferable to the
Negative rent reporting is considered a problem because the point is to not penalize people for their affordability constraints. Even the most reliable of them may be a little late on a payment once in a while when the thin financial cushion they have gets obliterated by hardship. The GSEs don't allow negative rent reporting for that reason.
Fintechs facilitating the collection of rent information also generally mitigate this concern in some way, be it offering a 0% loan to bridge a one-month gap, counting that payments were made but not necessarily when, or unenrolling customers who can't pay from reporting and the benefits associated with it, rather than adding a negative track record.
"We believe that there's enough negative incentives out there. What you need is to change behavior with positive incentives. So we only report positive rental payments, and the psychology backs us up. Negative incentives don't change behavior in any significant numbers," said Rowland Hobbs, co-founder and CEO of Stake.
Another way rent reporting could go wrong, at least from the perspective of some lenders, is by becoming so ubiquitous that the bureaus use it as another form of trigger lead.
The bureaus sell these leads to outside lenders when a borrower has pulled credit to work with a mortgage company. Some stakeholders in the housing finance industry have been pressing for legislation to restrict the practice through something like an opt-in approach so the consumers they work with aren't peppered with inquiries, while the credit bureaus have argued the practice encourages consumer choice. Lenders may prefer to use rent reporting as "more of an education tool versus a lead sourcing tool," said Nick Rozek, a loan officer at Embrace Home Loans.
But lenders concerned about its potential use for widespread lead generation may not have to worry about it because so many of the factors that go into renter decisions about whether to buy are subjective. That makes it challenging to quantitatively model their influence on consumer behavior in a programmatic way.
For example: Looking solely at the current high costs of both ownership vs. renting based on monthly payment size, the latter generally looks more attractive, which might suggest little conversion would occur. However, for owners with plans for longer homeownership tenures, the economics could look relatively better. Factors like whether the loan has a fixed rate or not, and other costs and priorities residents have, also come into play in decisions about whether owning is preferable.
"I think it's too much information for anyone to be able to definitively say, here's probably what's going to happen," said Jacob Channel, senior economist at LendingTree.
Ultimately the best approach to reaching the next generation of borrowers through rent reporting may be to make it part of the conversation or messaging with anyone applicable who shows an interest in learning what it takes to become a first-time buyer.
"It's a good tool if you're helping someone and you're advising them on the steps you need to take to become a homeowner," said Bill Rozek, a senior loan officer at Embrace Home Loans.
