The world of mortgages is about to see one of its biggest shake ups. Right now, approving someone for a mortgage takes a lot of time and effort by both parties. Even after all that, it’s very dependent on a FICO score. Both of those things are about to change.
The Federal Housing Finance Agency has been looking into alternative credit scoring models and supplements to the FICO score since 2015, but FHFA Director Mel Watt said in a speech in New Orleans on Aug. 1, that any change wouldn’t occur until 2019.
At Finicity, we understand changing the mortgage industry can be a long-term undertaking, but we have found a lot can change quickly with the right push.
Ever since the Rocket Mortgage Super Bowl ad changed the way everyone thought about the loan origination process, shortening the time it takes to get a mortgage has been a major piece of what we’re trying to accomplish.
In his speech in New Orleans, Watt said, “One of our biggest challenges has been getting lenders to make loans to creditworthy borrowers who want to buy a home.”
That shouldn’t be the difficult part. Lenders should be making loans to creditworthy borrowers who want to buy a home, and frankly they’re likely more than ready and willing.
It’s an issue of having the right tools to identify creditworthy borrowers. Alternative data can make the whole lending process more efficient. And while it may take some time to mature and be adopted, like almost every other digital transformation, it will happen rapidly. Even though, the FHFA is waiting, the transformation of lending using alternative data has already begun.
Offering a digitally native process for income and asset verification can play a key role in reducing the lending process from two months to two weeks without the headaches of searching, scanning, and sending bank statements back and forth. Making lending quicker for both the lender and the customer helps make loans easier to process and reduces the time they take, removing the dread of being captive for 10 weeks trying to purchase a home.
A major emphasis for us at Finicity is continued improvement of a consumer’s ability to access their financial data stored across their financial institutions. With a broader set of data, consumers can then better signal their suitability for a mortgage or car loan, and they can better manage their money on a daily basis. That data can also signal whether a person, despite limited actual credit history and the associated credit score, still has the income and responsible payment history necessary to handle a loan payment. Cash flow, income, assets, and employment history can all provide great insights into how well a person would handle their new loan payment.
With borrower permissioned data, Finicity can provide the methods for credit bureaus and lenders to see the alternative data that can help qualify thin-file and no-file credit applicants for loans they currently can manage, but can’t receive because of their lack of a credit score.
Alternative data can better serve the underserved populations, the younger, less established potential borrowers who have only ever rented and don’t have much if any credit history, as well as those who have never used credit, but have always paid their bills on time.
The FHFA sets benchmarks and goals for Fannie Mae and Freddie Mac to reach in order to spur the approval of mortgages to low-income families and areas of underserved minority populations. It’s these same groups that can be better served through alternative data for credit decisioning.
To borrow directly from the FHFA’s goals for their underserved markets plan, alternative data will help develop new loan products and more flexible underwriting guidelines. It will increase access to credit for those who are creditworthy and not just those with a high credit score. And the kicker is, with a digital experience it will dramatically reduce the time and work it takes to go through the mortgage process.
Alternative data can provide insights that will make the lending process more efficient, effective, and inclusive. And it’s already on its way.