Access to mortgage credit remains incredibly tight in part because we are not measuring the credit risk of renters appropriately. For many renters, the most significant financial commitment is paying monthly rent, yet traditional credit scoring does not account for borrowers who meet their commitment month after month.
Missed rent payments are picked up by the credit bureaus, but on-time payments generally are not reported. Adding rental pay history, via bank statements, to the qualification process would make assessing renters’ credit risk easier and expand access to homeownership among a significant portion of the nation’s population.
To better understand how rental payment history might impact mortgage credit risk, we have analyzed how past mortgage payment history can predict future loan performance and have compared the monthly payments of renters and mortgage holders. Our analysis, which was encouraged and funded by the National Fair Housing Alliance, shows that rental payment history is highly likely to be predictive of mortgage loan performance.
Borrowers who miss no mortgage payments for two years rarely miss a payment for the next three years.
To look at the importance of mortgage payment history, we use Fannie Mae and Freddie Mac loan-level credit data from their credit risk transfer transactions. These data include the payment history of all fixed-rate, full-documentation, fully amortizing mortgages issued from 1999 through 2016, with the payment history through the third quarter (Q3) of 2017. To do this analysis, we first sort the loans by the payment history over two years from Q4 2012 to Q3 2014, tallying up the number of missed payments. We then look at the share of these mortgages that went 90 days delinquent over the subsequent three years, from Q4 2014 to Q3 2017.
As you can see in the table below, a loan that has been paid on time for 24 months has a 0.25 percent probability of going 90+ days delinquent in the subsequent three years. At one missed payment, the probability rises to 4.36 percent, at two it jumps to 28.2 percent, and at three it jumps again to 47.8 percent.