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                        Research and Insights
                        Perspectives
                        Another Step to Unlock Homeownership for Underserved Borrowers
    Perspectives Blog
Another Step to Unlock Homeownership for Underserved Borrowers
September 30, 2021
Stacey Shifman
    Stacey Shifman
    Senior Director, Single-Family Analytics and Modeling
For decades, uneven credit opportunities have edged underserved populations out of homeownership, prolonging issues like the gaps in homeownership rates and wealth accumulation amongst races. To help address these challenges, Fannie Mae is finding innovative ways to responsibly increase access to credit, such as using positive rent payment data to assess mortgage eligibility.

Fannie Mae recently announced another update to Desktop Underwriter® (DU®) that aids in expanding access to mortgage credit for qualified borrowers. Loans underwritten through DU generally are subject to a minimum 620 credit score requirement. When assessing whether a loan meets this requirement, DU will now use the average of all borrowers’ median credit scores, instead of the lowest median credit score. Our analysis, discussed below, shows this to be a more accurate assessment of credit risk.

In the example below, Borrower 1 has a median credit score of 600 and Borrower 2 has a median credit score of 700. In prior versions of DU, the loan would be ineligible because the lowest of the median credit scores is less than 620. However, with the September 18 DU release, DU will now use the average of the borrowers' median scores, which would be 650.

**Borrower 1**
			**Borrower 2****Bureau 1******
			595
			695**Bureau 2**
			600
			705**Bureau 3******
			605
			700Minimum
			Average**Median******
			600
			700
			600
			**650**

The median score is determined by taking the lesser of two or middle of three credit scores obtained per borrower.

This update will not change DU’s risk assessment, as credit scores are not an integral part of the DU risk assessment. While Fannie Mae uses credit scores to establish a minimum credit score threshold of 620, DU performs its own analysis of the credit report data. In other words, even though a loan may now meet the minimum 620 credit score requirement, the loan may or may not receive an Approve/Eligible recommendation and be eligible for sale to Fannie Mae. This change to use the average of borrowers’ median credit scores will allow more prospective borrowers to be considered by DU’s risk assessment instead of deeming the loan ineligible solely because the lowest median credit score is below 620.

To illustrate the potential impact of this enhancement from a credit risk perspective, we analyzed the loan performance through March 2021 of loans we acquired from 2000 to 2010 on Fannie Mae’s publicly available Single-Family Loan Performance Data – a time period that was selected because there wasn’t a 620 minimum credit score requirement before December 2009. Based on our analysis, we found that the average median credit score was more indicative of how the loan would perform than the lowest median credit score. This held true for loans where the lowest median credit score was below 620.

A measure we review in evaluating the efficacy of credit risk models and thresholds is the “tail capture rate,” which is calculated by identifying the lowest scoring 10% of loans and then counting the number of adverse credit events in that 10% divided by all adverse credit events. The higher that rate, the better the score is at rank ordering credit risk because it indicates that the score is better at identifying actual adverse credit events. In the table below, the tail capture rate and ever seriously delinquent rate (referred to as the “ever SDQ rate”) for loans with credit scores below 620 were calculated for both credit score calculations. The ever SDQ rate measures loans that became 90-plus days delinquent during the performance window. The average of the median credit score calculation identified two percentage points more ever SDQ loans in the lowest scoring 10% than the lower of median calculation. The average of the median calculation also identified three percentage points more loans with credit scores below 620 that became ever SDQ during the performance window. This shows that the average of the median credit score is a better indicator of credit risk than lower of median credit score.

**Average of Median**
			**Lower of Median****10% Tail Capture Rate**
			36%
			34%**Ever SDQ Rate* for loans with a credit score <620**
			19%
			16%

* Ever SDQ is defined as loans that were 90-plus days delinquent during the performance window

In addition, for two-borrower loans in which one borrower had a credit score less than 620, the loan performed better if the co-borrower's credit score was higher. The higher the co-borrower’s score, the better the loan performed regardless of the lower score of the other co-borrower. This result was true across all acquisition years evaluated, as well as multiple credit performance metrics, such as early payment defaults (EPD) and ever SDQ. This intuitively makes sense – we believe the borrower with the higher score is likely to want to maintain their good credit by continuing to make their payments on time rather than take on the payment behavior of the lower scoring borrower.

Using the loan population described above, the table below illustrates that loans with a higher average credit score had a lower incidence of EPD and ever SDQ even when the lowest median credit score on the loan was below 620. To analyze this, we reviewed a group of loans where the lowest median credit score was below 620 and calculated the borrowers’ average median credit score. We then compared the relative credit performance of loans with an average median credit score less than 620 against the performance of loans in other credit score buckets.

Loans with an average credit score of 640-659 were an estimated 65% (100% minus the Relative EPD of 35%) less likely to experience an early payment default event and 36% (100% minus the Relative Ever SDQ of 64%) less likely to experience a serious delinquency event compared to a two-borrower loan with an average credit score below 620. As the gap between the average credit score and the lowest credit score increased, the relative ever serious delinquency rates decreased. For average credit scores above 680, these loans were an estimated 80% less likely to experience an early payment default event and about 63% less likely to experience a serious delinquency event during the performance period.

**Average Credit Score******
			**Loan Count******
			**% of Loan Population Analyzed******
			**Relative EPD******
			**Relative Ever SDQ******< 620
			237,988
			49%
			100%
			100%620 - 639
			133,154
			28%
			56%
			85%640 - 659
			62,903
			13%
			35%
			64%660 - 679
			30,865
			6%
			27%
			46%680 +
			18,392
			4%
			20%
			37%Total
			483,302
			100%

In addition, we expect that a larger percentage of borrowers from underserved populations will be eligible for DU’s risk assessment with this update. In a recent analysis of historical data where the loan application had one borrower with a credit score below 620, more than 30% of the applicants whose average median credit score was above the 620 minimum threshold were from underserved borrower groups.

This update is just one more step on our mission to facilitate equitable and sustainable access to homeownership while promoting safe and sound lending. We look forward to partnering with our customers to see the benefits of this change.

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