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Rental Payment History vs. Mortgage Delinquency Risk

Rental payment history is indicative of future mortgage loan performance and should be considered when individuals apply for mortgage loans, according to new research from the Urban Institute.

“Access to mortgage credit remains overly tight in part because we are not measuring the credit risk of renters appropriately,” researchers Laurie Goodman and Jun Zhu wrote on the Urban Wire blog.

They assert that their research concluded rental payment history “is highly likely to be predictive of mortgage loan performance.”

Currently, missed rental payments are taken into account by credit bureaus while on-time payments are disregarded.

Examining Fannie Mae- and Freddie Mac-backed mortgage loans issued between 1999 and 2016, Goodman and Zhu observed that, across all loans, the chance of serious delinquency rises precipitously with the number of missed payments over a two-year period.

Loans that have not missed a single payment in two years have just a 0.25 percent chance of becoming 90 or more days past due, or seriously delinquent, in the following three years. After one missed payment, the loan has a 4.36 percent chance of becoming seriously delinquent within three years. After three missed payments, the loan's chance of becoming seriously delinquent in the next three years is 47.81 percent.

Demonstrating a steady rental payment history might then help determine an individual’s likelihood of becoming delinquent. However, the researchers noted that “renters are, on average, less affluent than homeowners, have lower credit scores, and put down less toward the purchase of their first home.”

The researchers accounted for these factors by breaking loan payment history down by FICO scores and loan-to-value ratios.

Borrowers with FICO scores greater than 750 and no missed payments within the past two years had 0.13 percent chance of falling into serious delinquency over the next three years, while borrowers whose FICO scores were on the low end—less than 700—and who had no missed payments in the past two years demonstrated a 1.03 percent chance of becoming seriously delinquent.

Differences in loan-to-value ratios also translated to differences in default likelihood. With no missed payments in the past two years, borrowers with LTVs greater than 95 had a 0.53 percent chance of serious delinquency, while those with LTVs less than 80 had a 0.22 percent chance.

Combining low FICO scores and high LTVs, borrowers still fared well with a clean payment history. Those with FICO scores below 700 and LTVs of 80 to 95 had a 1.14 percent chance of becoming seriously delinquent, barring any missed payments in the past two years.

The Urban Institute also examined monthly housing expenses for renters and owners, finding they were comparable at similar income levels, excluding those earning under $20,000 and those earning over $120,000.

“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,” Goodman and Zhu wrote.

The Urban Institute’s study was funded by the National Fair Housing Alliance.

About Author: Krista Franks Brock

Krista Franks Brock is a writer and editor who has covered the mortgage banking and default servicing industries since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

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