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Affordability, Technology, and the Future

Editor’s note: This feature originally appeared in the August issue [1] of MReport, out now.

Danny Gardner leads Freddie Mac’s Single-Family Affordable Lending and Access to Credit business. In this role, he is primarily responsible for fulfilling Freddie Mac’s community mission to provide sustainable homeownership education and financing to families who are traditionally underserved by the market. MReport spoke with Danny Gardner, SVP of Affordable Lending and Access to Credit, Freddie Mac about some overlooked areas in the mortgage lending and servicing industry.


How is Freddie Mac working to meet the needs of non QM, self-employed, and other borrowers who don't fit into the traditional box?


The lenders that I've spoken to tend to use some of the non-QM products. They are largely oriented to the self-employed, so we recognize that is a prevalent challenge. Historically, it always has been in mortgage lending, due to the complexities of each individual and the way they may translate their business activity to their tax return activity.

Recent studies indicate self-employment will be as high as 40% of the U.S. population by the year 2050. That will be the amount of consumers in the country who have some form of self-employment income, so it is clearly a current and emerging need in the marketplace. We also think about the so-called "gig economy." I'm fascinated about how they supplement their income through any number of part-time gigs that they take on to create a total household income. I can only imagine the challenges that presents when they are attempting to finance the purchase of a home.

Freddie Mac recently launched our asset and income modeler, and the first phase what we call “AIM.” The first phase of AIM is dedicated to helping with the origination of self-employed borrowers. We do this through the integration of third-party financial technology into our loan product advisor . That technology makes it simple for lenders to simply scan tax documents provided by the borrower, and the technology will make a calculation of income on behalf of the borrower for purposes of calculating their debt to income. 

In the future, we'll also be working through other sources of third-party income that we can draw from in order to make other income calculation efficiencies for our customers and for consumers.


What other homebuyer trends do you think will be important over the next decade?


By 2025, we anticipate, approximately 70% of all new homeowners to be of a diverse background, and over half of that emerging population will be Hispanic. Why is that important? Given our shortage of inventory in the country today, we are already starting to see trends of what I would call “densification,” or multiple generations living under one household. Sometimes that can be done in under an existing structure, but other times it will require modification of the structure to accommodate multiple generations within that single household.

Freddie Mac is about to release an update to our renovation mortgage guidelines, which will make it easier for lenders to use the product to help consumers acquire properties, refinance properties, or modify those properties. Lenders will be able to sell those properties to us prior to the completion of the renovation, so they can have more immediate liquidity and bear less risk.

We also recognize that there's an ever growing population of people over the age of 65 who are remaining in their single-family homes, choosing to age in place. They, too, may want to cohabitate with younger generations of their families so that they can live out their lives with family, as opposed to in generations past when they might have moved into some type of assisted care facility.

A down payment is another factor. Home prices continue to grow, but wages have not kept pace. We are starting to see wages start to grow now, as well as a flattening of home price appreciation at the aggregate level. There's so much pressure on the demand for entry-level housing stock that you're continuing to see that portion of the market grow year-over-year. Consumers are going to need more flexibility and solutions with down payments. 


What lessons should lenders and servicers take away from initiatives such as Freddie Mac’s Borrower of the Future program?


We are moving into an ever-changing environment, with demographic changes, economic changes, and lifestyle changes happening with consumers throughout the United States. We're one of the largest investors in mortgages in the United States, and we have a fair amount of data available from an internal perspective. We want to use that information, as well as what we can access in partnership with other parties, to start identifying the trends in the marketplace and thinking about how they're going to impact the future homebuyer. 

We want to share that information with the industry, and our customers in particular, so that we can be aligned with them on what solutions that we might invest in with them in order to be prepared for these future changes. We will be publishing all this information at borrowerofthefuture.com.


How does Freddie Mac’s Green Choice program work to influence affordability?


Data from the Harvard Joint Center suggests that over 80% of homes in the United States are at least 20 years old, and at least 40% of homes in the U.S. are at least 50 years old. We hope that as these properties are remodeled, or, as new properties are built, that consumers take the opportunity to think about how they might reduce their overall monthly housing expenses in addition to contributing to a sustainable environment by taking advantage of new energy-efficient technologies.

We just released a new product that we called the Green Choice Mortgage, which can be used for a purchase or for a refinance. We permit up to 15% of the after-repair values to be used to finance energy-efficient enhancements such as solar panels, tankless hot water heaters, additional insulation, and the like.

Freddie Mac has also been active with the Appraisal Institute, and one of the things that we note about energy-efficient renovation and construction is that consumers may not understand the benefit or the value. If they are not able to capture that value in their appraisal, that additional investment will not essentially be realized through the growth of equity and resale of the property.


What are some other ways that technology is changing the way Freddie Mac supports its commitment to affordable homeownership?


If you think about the mortgage origination process, like all manufacturing processes, it tends to be a fixed cost of manufacturing. It is the consumers, at the end of the day, who bears the cost of the origination. Any enhancement that we make to make the mortgage loan origination process—and the servicing process, for that matter—more certain and more efficient will transfer to lower costs, not only for our customers, but also, ultimately, for the consumers.

When you're talking about a lower loan balance, or somebody who is of lower income, those fixed costs are actually considerably more meaningful to them than someone who has a larger purchase price home, and certainly more income to sustain that amount, so we do things such as providing more certainty of sale to our customers by expediting the origination process. It's true that time is money, and if consumers have the opportunity to have shorter contracting periods, shorter rate lock periods, that's true savings from which they can benefit.