Federal Home Loan: How Freddie Mac’s Data-Driven Approach Helps Lenders Qualify More Borrowers
I’ve been in the mortgage industry for over 20 years and the innovations I’ve seen during that time are nothing short of remarkable. Today, when Freddie Mac makes the decision to buy a loan, we consider nearly 80 unique data elements to inform our actions. This data-driven approach allows us to help our lending partners reach more borrowers more efficiently, while mitigating risk to our business and the housing finance system.
Over the past year, we’ve launched a number of innovations that do just that. For example, lenders can now verify a borrower’s assets, income and employment using bank account data or customer-approved payroll data – a feature available nationwide through our automated subscription system, Loan Product Advisor® (PLASM). This reduces the burden of paper documentation to close loans faster. And in today’s market, these innovations provide lenders with efficiencies that can lead to cost savings and improvements in the borrower experience. Our digital approach also helps improve accuracy and security over the traditional paper-based approach.
Just last week we hit another milestone on that front, announcing that LPA will include a review of a borrower’s bank account data to identify a history of positive monthly cash activity as part of our loan purchase eligibility assessments. In short, with their clients’ permission, lenders and brokers can submit financial account data to LPA to identify 12 or more months of cash activity to include 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. Submitted account data 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 are operating at lower costs of $2,200 per loan. The most profitable lenders grant loans almost three times more efficiently than their less efficient counterparts. In addition, by adopting our automated offerslenders can shorten cycle times by up to 15 days, resulting in a 30% reduction in loan origination costs, higher client satisfaction, and an increase in the number of applications processed and closed.
Increasing home ownership through innovation
Freddie Mac is also taking this innovative digital approach beyond traditional asset verification – we’re identifying the factors that can drive homeownership to even more families across the country.
For example, one of the first steps in buying a home is to have a positive credit history. There are over 40 million renters in this country, and for many, their rent payment is their biggest monthly expense. Despite this, responsible rent payment history has traditionally not factored into a consumer’s credit profile. At Freddie Mac, we’re changing that.
We now consider on-time rent payments in loan purchase decisions. It’s part of our company-wide approach, which includes comprehensive resources that help consumers understand credit and tenants build and improve their credit ratings by reporting on-time rent payments to the three major credit bureaus.
Freddie Mac’s innovations also support our mission by making sustainable homeownership more affordable and accessible to borrowers with non-traditional sources of income. For example, our LPA tool can assess sources of income for people on fixed incomes or other sources of income, such as retirement, social security, veterans benefits, alimony, and child support. Additionally, LPA can assess a self-employed applicant’s income from tax return data – a capability the company launched in 2019. This ability to verify a mortgage applicant’s key financial criteria, including including reliable alternative credit data sources, was an important development.
Our work is far from over. As an organization, Freddie Mac takes its role as a trusted advisor to a lender seriously. We have had great success helping our clients develop and implement best practices when adopting our solutions that meet their unique business objectives. We’re always looking for new and better ways to support the housing finance system, and we know that these digital tools often result in a better experience for borrowers. So look to us – and count on us, to continue finding new ways to provide our clients with personalized plans that expand the possibilities for safe and secure homeownership.
©2022 by Freddie Mac.