Can integrating alternative consumer insights into the mortgage market increase access to homeownership or improve mortgage portfolio risk management?
Housing starts are up by 25% according to the National Association of homebuilders. This along with positive employment numbers sends a message to the market that the US economy is showing continued positive signs of recovery from the Great Recession. Is this recovery reaching all communities and are their opportunities for those hit hardest by the recession to recover and get back on track?
It is not so apparent that the mortgage and housing industry is providing credit access to consumers or changing the underwriting processes to integrate additional insights about consumer creditworthiness into the mortgage lending process. Last month, Zillow.com and the Urban league released a report on the Path to homeownership
Some of the lack of innovation is occurring due to legacy systems that are difficult to update or change within mortgage lenders. In addition, the changes to QM have led many mortgage bankers to focus on those requirements in an attempt to continue to have a pipeline to capital via secondary market securitization activity. Firms like Seer Capital, Angel Oaks and the Macquarie Group are purchasing non-conventional mortgage loans and plan to securitize and sell them on the secondary market. Opportunities to change the way the mortgage market works and innovation to meet the changing needs of consumers is always needed.
Most consumers are aware of the role that Fannie Mae and Freddie Mac play in the mortgage market. During the recession, many lenders tightened credit standards in their mortgage origination process. Some in the industry argue that this exacerbated market conditions while others indicate that it was prudent and justified given the devaluing of property combined with increased unemployment and the general uncertainty in the market.
The American dream of homeownership has come under a tremendous amount of criticism since the great recession. Many factors contributed to the housing bubble including complex financial instruments, rising home prices not all increases driven by true market conditions, credit standards and secondary market issuances that spread risk across the entire market. Over the last five years, many experts analyzed and reported on these factors including criticizing the former Federal Reserve Bank Chairman, Alan Greenspan on his policy decisions related to dealing with economic bubbles.
The housing bubble highlighted opportunities to improve and change the ways in which home mortgage loans are underwritten, valued and managed.
Mortgage underwriting relies heavily on property value along with traditional credit bureau data and credit bureau scores. It is widely understood that consumers that have the same credit bureau score are not the same. A one dimensional view of the consumer does not always give a lender a complete picture of risk.
Prior to joining LexisNexis Risk Solutions, I worked with large community banks to develop products and lending programs that would create value to their organizations. In some instances, these lenders believed that they knew their customers really well and had a good, demonstrated understanding of their customers. However, when delving further into their underwriting process, there were gaps in both the information used to evaluate creditworthiness and the process implemented to serve their customer base. Some challenges in the mortgage industry are structural market limitations. This may include technology limitations, secondary market requirements for loan sales and rating agency requirements for example.
Whether a mortgage is sold into the secondary market or held within a lenders portfolio, having a multi-dimensional view of consumers benefits the consumer and market participants.
How do you get these added insights into the consumer? Are there ways to enhance mortgage lending to include more consumers that have been shut out of the credit system?
Integrating alternative data into the underwriting process will give a lender added insight into stability, willingness and ability to pay. This will be increasingly important as recovering consumers having damaged credit profiles are trying to rebuild credit, Millennials and new to credit consumers are trying to get access to credit and consumer advocacy groups are trying to get and increase access to consumers that have been historically underserved.
Financial and credit inclusion is an important challenge that market participants are trying to solve. While Next Gen alternative data is making its way into other lending markets like auto, when will this in depth knowledge are integrated into the housing market?
National Mortgage News: Banks Should Be Asking What’s Outside Your Wallet
National Homebuilders Association: Housing Starts and Interest Rate Forecasts
Federal Housing Finance Agency: Proposed Minimum Financial Requirements for Enterprise Seller/Servicers
Bloomberg: Subprime Bonds Are Back With Different Name Seven Years After U.S. Crisis
Bloomberg Business: Greenspan Says He Would Pre-Empt Asset Bubbles Financed by Debt