This past Saturday (July 29), Fannie Mae implemented a change that’s been in the works for several months. Starting now, Fannie will be able to approve mortgages with a debt-to-income (DTI) ratio of 50%, which is up from the 45% limit that had previously been in place. This change will expand the pool of prospective borrowers for the mortgage giant by as many as 95,000 per year.
There are certainly arguments in favor of such a move. As the HousingWire article linked-to above says, a disproportionate number of those new borrowers are likely to be Latino and African American families, who are 1.5 times more likely to have DTI’s above 45%. Business Insider has also pointed out that this move will also allow more millennials to get a mortgage, saying “Student loans are the largest source of debt in the U.S. apart from mortgages. And so, this eased requirement could benefit millennials who are looking to buy their first homes.”
For those who are concerned about an increase in potential defaults, the Washington Post comfortingly tells us, “Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.” (I wonder which “almost 15 years” they looked at?)
If you’re reading this and thinking to yourself that expanding the amount of debt a person can carry and still be approved for more debt is short-sighted, and asking for trouble, you’re certainly not alone. Events like the collapse in 2008/2009 have a way of living long in the memory, and concerns about history repeating itself are completely valid.
This puts mortgage lenders into a tight spot. On the one hand, there is constant pressure to grow—and to grow, you need to issue more loans. To issue more loans, you need more customers, and of course you can’t get more customers if you keep rejecting them. On the other hand, mortgage defaults are costly, and potentially disastrous when they occur en masse.
The answer, to me, lies not in loosening standards, but in looking at metrics that have been previously ignored. This is the era of big data, of AI analytics, of alternative lending, and alternative credit scoring. These are technologies that have been making their way onto the Finovate stage for years, and they are increasingly being pointed at mortgages and real estate. We have access to incredible amounts of data about potential borrowers, we can direct machine-learning algorithms to sift through it, giving us a much more complete picture of a mortgage applicant than ever before. Do the “old” mortgage standards account for our new capabilities? Probably not.
So should the acceptable DTI ratio go up? Yes, at least in some cases. It’s absurd to think that the current system is operating at 100% efficiency, awarding mortgages to all of the people who are “creditworthy,” however you define that metric. But in order to raise it responsibly, it needs to be balanced by other data points and analytics that can point to a clear picture of creditworthiness, a picture that lies outside what the traditional model can account for.
Is Fannie Mae doing this the right way, with a model that will expand their potential customer base without exposing them—and our economy—to more risk? Or have the lessons of 2009 been forgotten (ignored?) by a new wave of executives who are simply looking to boost the bottom line, regardless of potential long-term consequences? Only time will tell, but I hope this is the start of a new credit-decisioning model that reflects our newfound technological capabilities.
Join us at FinovateFall 2017 in New York to see live demos from innovative fintech companies. Mortgage tech and real estate tech will be prominent themes at this year’s show, both during the demos that will take place on September 11 and 12, and the discussion that will take place on September 13 and 14. To register, go to finovatefall.com.
