How Freddie Mac’s Data-Driven Approach Helps Lenders Qualify More Borrowers
I’ve worked in the mortgage industry for more than 20 years and the innovations I have seen during that time are nothing short of remarkable. Today, when Freddie Mac makes a decision to purchase a loan, we consider nearly 80 unique data elements to help inform our actions. This data-driven approach allows us to help our lender partners reach more borrowers more efficiently, while mitigating risk to our company and the housing finance system.
Over the last year, we have launched a number of innovations that are doing just that. For example, lenders now can verify a borrower’s assets, income and employment using customer-approved bank account data or payroll data — a functionality that is available nationwide using our automated underwriting system, Loan Product Advisor® (LPASM). This helps reduce the burden of paper documentation to close loans faster. And in the current market, these innovations deliver lender efficiencies that can lead to cost savings and improvements to the borrower experience. Our digital approach also helps drive greater accuracy and security than the traditional paper-driven approach.
Just last week, we hit another major milestone on this front, announcing that LPA will include a review of a borrower’s bank account data to identify a history of positive monthly cash flow activity as part of our loan purchase eligibility assessments. In short, with their customers’ permission, lenders and brokers can submit financial account data to LPA to identify 12 or more months of cash flow activity for inclusion in a borrower’s risk assessment. Data can be obtained from checking, savings and investment accounts, including those used for direct deposit of income and monthly bill payments, such as rent, utilities and auto loans. The account data submitted can only positively affect the credit risk assessment. And to help identify opportunities, our system will notify lenders when submitting this account data could benefit a borrower.
Our studies show that lenders who use digital tools at a higher rate in the mortgage origination process operate at costs that are $2,200 less per loan. The top cost-effective lenders originate loans nearly three-times more efficiently than their least-efficient counterparts. In addition, by adopting our automated offerings, lenders are able to shorten cycle times by as many as 15 days, translating into a 30% reduction in loan origination costs, greater customer satisfaction and an increase in applications being completed and closed.
Increasing Homeownership Through Innovation
Freddie Mac also is taking this innovative digital approach beyond verifying traditional assets — we are identifying factors that can bring homeownership to even more families across the nation.
For example, one of the first steps to purchasing a home is having a positive credit history. There are more than 40 million renters in this country and, for many, their rent payment is their largest monthly expense. Despite this, responsible rent payment history traditionally has not been counted as part of a consumer’s credit profile. At Freddie Mac, we’re changing that.
We now consider on-time rent payments as part of loan purchase decisions. It’s part of our enterprise-wide approach, which includes comprehensive resources that help consumers understand credit and renters build and improve their credit scores by reporting on-time rent payments to the three main credit bureaus.
Freddie Mac’s innovations also support our mission by making sustainable homeownership more affordable and accessible to borrowers with non-traditional income sources. For example, our LPA tool can assess income sources for individuals with fixed incomes or alternative income sources, such as retirement, Social Security, Veteran Affairs benefits, alimony and child support. In addition, LPA can assess a self-employed applicant’s income from tax return data — a capability the company pioneered in 2019. This ability to verify a mortgage applicant’s key financial criteria, including reliable alternative credit data sources, was a significant development.
Our work is far from done. As an organization, Freddie Mac takes seriously its role as a lender’s trusted advisor. We’ve had great success helping our clients develop and implement best practices when adopting our solutions that meet their unique business objectives. We are always in search of new and better ways to support the housing finance system, and we know that these digital tools often result in a better borrower experience. So, look for us — and look to us, to keep finding new ways to provide our clients with customized plans that expand homeownership opportunities safely and soundly.
©2023 by Freddie Mac.
Freddie Mac Green MBS Making an Impact for Homeowners and the Environment
Mark Hanson, SVP Securitization
Big Results with a Small Nudge for Renter Credit Building
Corey Aber, Vice President of Multifamily Mission, Policy and Strategy