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Freddie Mac Pushes For Loans To Sub-Prime Borrowers (WTF?)

Regulator recently met with housing-finance giant and the fintech firm behind the software. Freddie Mac Pushes For Loans To Sub-Prime Borrowers (WTF?)

An effort under way at housing-finance giant Freddie Mac could increase mortgage approvals for borrowers who might otherwise be shut out of home buying.

Freddie has been testing underwriting software from a financial-technology firm, ZestFinance, that could make mortgages more available for certain applicants, including first-time home buyers and minorities, according to people familiar with the matter. The software evaluates consumers’ borrowing and income histories in new ways, the people said.

Freddie has been testing the software for at least several months, the people said. The mortgage giant is assessing whether the software can improve the accuracy of its own models’ risk predictions, some of the people said.

Freddie and ZestFinance met with Freddie’s overseer, the Federal Housing Finance Agency, a few months ago to discuss the matter, the people said. The two companies were scheduled to speak about the effort at a conference next month. Freddie canceled after deciding it wasn’t ready to go public with the information, according to one of the people.

“We are exploring using Zest’s software to better manage our risks,” a Freddie spokesman said. “We have nothing to announce at this time.”

ZestFinance didn’t respond to requests for comment. The fintech firm helps big lenders use artificial intelligence, essentially more data combined with better math, to evaluate applicants for loans including credit cards and auto loans.

Freddie and its sibling, Fannie Mae , are in the middle of intense political jockeying. The Trump administration aims to return the two companies to private ownership, and cautioned in a report this month against loosening lending standards.

The people familiar with the discussions between Freddie and ZestFinance say the aim isn’t to loosen lending standards but to approve applicants who are more financially responsible than stand-alone factors like their credit scores or down payment amounts suggest. The software could help mortgage lenders identify more borrowers, but without increasing the risk of loan losses, the people said.

Freddie helps run the plumbing that underlies the U.S. housing finance system, and its standards deeply affect the entire mortgage market. Freddie and Fannie have been experimenting for several years with steps to make home loans available to more borrowers. In the first half of this year, Fannie and Freddie together backed about 40% of U.S. mortgage originations, according to industry research group Inside Mortgage Finance.

The mortgage giants have long had an inherent tension. The two companies are expected to make mortgages more affordable and more readily available, but without taking on the risk that caused them to nearly collapse in the financial crisis. Fannie and Freddie don’t make mortgages. Instead, they package home loans into securities, sell them to investors and protect the investors if the loans go bad.

Lenders traditionally consider a consumer’s borrowing history, which is encapsulated in their credit reports, when deciding whether to give them a loan. The ZestFinance software would parse a consumer’s financial history to analyze trends including in borrowing and income. Mortgage applicants who could benefit include those who have a low credit score, high debt levels or other red flag but have other positive characteristics, some of the people said.

That could help a person who, for example, has only a small down payment but also has a good credit score. It could also allow for people who have low or no credit scores strictly because of a limited borrowing history to get a mortgage.

Some individuals who fall close to or just below the criteria currently required for loans that Freddie buys could also benefit, some of the people said.

Fannie and Freddie have been experimenting with ways to make mortgages more available for several years. They now back mortgages with down payments of as little as 3% and are backing more loans made to borrowers with higher debt levels.

 

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