Freddie Mac adds new tax data source that may limit repurchase risk

Freddie Mac has added its first direct-data source for certain self-employed borrower income to a suite of tools lenders use to digitally validate mortgage information and potentially reduce loan buyback risk.

A vendor called Halcyon, which also runs a digital platform for tax preparation professionals similar to what companies like Uber provide for drivers, facilitates the direct feed of transcript data used by borrowers who report using Schedule C, Chairman and CEO Kirk Donaldson said.

That particular Internal Revenue Service form plays a key role in the underwriting of self-employed borrowers because it reflects income from sole proprietors, a category that's been growing with the availability of digital platforms for contract workers like Uber.

Donaldson said Halcyon may facilitate the sharing of other types of data in conjunction with Freddie in the future, and the government-sponsored enterprise is open to add other service providers that meet its standards.

Halcyon has been able to get information directly from the IRS in part due to business purpose permissions it has because of its tax prep platform. Advances in data exchanges and application programming interfaces have also made it possible, Donaldson said.

"This is one of those times when technology is coming together at the right moment," said Donaldson, noting that matching the fields necessary from one format to another took a year, but the results have reduced the costs of transcripts used by lenders markedly.

"If you're spending the national average for transcripts, which is $41, we're charging $10," he said.

Technology advances could eventually make the traditional tax transcript used in mortgage underwriting obsolete, but it will take time, Donaldson added.

It's unclear how far the new technology will go toward reducing the kinds of flaws in loan information that can prompt Freddie Mac to ask lenders to repurchase loans but the enterprise said similar automation has demonstrably reduced them.

FreddieMac found that lenders using the broader set of tools used to model borrower income and assets produced loans with fewer defects and marginally better performance than those that didn't.

The average defect rate for mortgages sold to Freddie using these tools has been 4.5%, as compared to 9.6% for other loans, according to 2021 data in a study published earlier this year. 

That study also found that the nonperforming loan ratio between the first quarters of 2018 and 2022 was 1% for the average purchase mortgage. That compared to 0.5% for mortgages processed with tools from Freddie's Asset and Income Modeler  For rate-and-term refinances, the nonperforming loan ratio was 0.7% for the average mortgages sold without the use of the AIM technology, vs. 0.6% for those that used the automation.

Donaldson said the direct feed from the IRS should reduce defect risk considerably.

Halcyon's offering adds to representation and warranty relief in return for digital self-employment data validations Freddie Mac's been offering since 2019. This was initially offered through a vendor called LoanBeam that Donaldson also founded and later sold. 

LoanBeam offers a different service from Halcyon involving data extracted from tax returns and related calculations lenders use, Donaldson said. Other vendors that have helped lenders and Freddie Mac work with self-employed borrower data include LoanCraft and CoreLogic.