No products in the cart.
- Latest
- Trending
ADVERTISEMENT
Homeownership is arguably the most important driver of American generational wealth.
Local lenders should be able to leverage data
But in the face of further economic uncertainty, that is not a guarantee for the current generation of homebuyers. Millennials make up the largest homebuying demographic, but have the lowest home ownership rate of any generation.
With the aftermath of the financial crisis of the late 2000s still lingering and mortgage credit still tight, a borrower’s credit score is now one of the biggest barriers to securing a mortgage. .
Many Americans are considered “invisible credit.” That is, their credit file is thin or non-existent. If lenders continue to rely on the same data risk assessments she did 20 years ago, the odds of a borrower being denied a mortgage only increase.
Housing supply is starting to rise again in the face of rising mortgage rates, but competition for housing remains fierce. Quick access to capital is more than ever a priority for buyers. However, in 2020, 70% of approved mortgages were given to borrowers with a credit score of at least 760. This trend, in particular, continues to push more people out of the market. Young, first-time buyers who traditionally have low or no credit scores despite solid income and payment histories.
In this environment, it is important to expand the definition of credit worth risk to assess other factors that are highly correlated with repayment ability. This may be outside the scope of traditional credit scoring techniques. For example, individuals or families with consistent annual income and labor force, on-time rent payments, and low debt burdens should be considered more strongly.
Small- to medium-sized lenders originate more than 40% of all mortgages in the U.S., and community banks are the only banks in one of five U.S. counties, according to Brookings. , providing access to essential financial services for millions of people. By leveraging their own assets, these local lenders have the power to create more comprehensive loan products than their larger competitors. These services can meet the requirements of a wider range of borrowers, better reflect the needs of local communities, and reach out to underserved segments of the market.
Local lenders also tend to offer a wide range of loans that are particularly suited to niche demographics such as military and rural populations. We offer ‘portfolio’ loans. Offering specialized mortgages means that these local lenders tend to approve more borrowers than their larger competitors, even those with less than perfect credit ratings. increase.
Data from the Home Mortgage Disclosure Act (HMDA) show that smaller banks are less than half as likely to deny mortgage applications as larger banks (7.4% vs. 17.2%). Only 2.6% of these applications were rejected on credit, also less than half (5.7%) of the larger banks.
Since the boomers first entered the market, U.S. homeownership rates have come under regular pressure and are expected to fall 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 access.
Local lenders have the relationships, financial flexibility and data to transform market access as well as forge relationships to meet a wide range of borrower needs. By leveraging unique data insights combined with long-term customer relationships, local lenders can better understand borrower profiles and financial realities.
However, 32% of small and midsize lenders say correcting inaccuracies, discrepancies and duplication in borrower data is one of the biggest challenges they face this year. Properly applying this knowledge will enable lenders to build better, more creative and comprehensive mortgage products and serve entirely new segments of the market.
It’s also important for lenders to identify the parts of the existing mortgage process they’re creating rather than removing barriers for borrowers. For example, low-income borrowers may have more complex sources of income from multiple jobs, such as 1099 income.
Technology can help aggregate and consolidate a complete picture of a borrower’s income before the loan is submitted to an underwriter. Lenders can leverage their technology to bring transparency, fairness and efficiency to the entire mortgage process.
Similarly, better technology will support more robust HMDA reporting and enable significantly better policymaking in Washington, DC. Under HMDA, mortgage lenders are required to publish loan-level information about their mortgages. However, since it was enacted in 1975, HMDA-related questions have elicited low response rates. Many borrowers do not trust their responses to be treated fairly and may be more likely to be denied a loan. Without access to these valuable data insights, policy decisions may be based on a more limited data set, resulting in a less complete picture of the market.
From reducing closing costs to reviewing credit lines, local lenders are removing common barriers to access. However, to further improve pathways to homeownership for underserved communities across the country, local lenders are leveraging data to expand their reach and build trust with a more diverse group of homebuyers. You need to be able to establish relationships.
