Industry Voice: Eye-opening friendship leads to mortgage for shared households
By Walter Scott | December 15, 2016
Close to 30 percent of all U.S. households include adults who aren’t the head of the household or their spouse.
These shared households may include unmarried couples, siblings and their families doubling up, adults caring for an aging parent, or grandparents caring for the children of working parents.
Minority and immigrant households are more likely to be shared. About half of these households are extended income households (EIHs). The additional adult members of EIHs have income that is at least 30 percent of head-of-household income.
Until recently, that additional income was invisible to our underwriting process, making it difficult for these households to qualify for a mortgage.
What Fostering Children Taught Me
Years ago, my wife and I were caring for two young foster siblings — a boy, 3, and girl, 1. They came from a struggling family whose father was an immigrant from El Salvador.
Over the years, the father’s financial circumstances improved. He was able to buy a home and became an anchor for siblings and other immigrant family members. Many of those family members pitched in — not just financially but also with child care, household chores, and transportation – all of which had a stabilizing and strengthening effect on the family. This support network allowed their father to focus on work and becoming more financially stable.
The extended family now lives in a bustling, happy home. There’s a lot of strength in how they live. In watching this success, I realized that even when family members weren’t directly contributing to payment of the mortgage, they were helping to stabilize the household.
After obtaining a PhD and taking on the role of economist in Fannie Mae’s Credit Portfolio Management (CPM) group, that observation continued to have a profound impact on my life and work.
My colleagues and I decided to track and analyze mountains of demographic data from the American Housing Survey to understand how households were changing, and whether mortgage lending rules should be adjusted to address those changes.
Our research showed that EIHs were better able to withstand negative shocks to borrower income and were more likely to stay in their homes when facing financial difficulty than non-EIH households. Lenders could qualify borrowers in EIHs for larger mortgage loans without incurring additional credit risk compared to otherwise comparable borrowers – potentially expanding opportunities for underserved communities.
Based on this research, Fannie Mae introduced HomeReady® mortgage, an affordable mortgage product that enables homebuyers to pool their income for loan applications. The program recognizes the growth of EIHs by allowing non-borrower contributions to be considered during the underwriting process.
There’s no doubt that the trend toward EIHs will continue.
We expect 80 percent of new households formed from 2010-2030 to be non-white. And we expect the majority of these non-whites to be renters rather than homeowners – keeping their homeownership gap high.
More research on how the housing market is evolving will provide a better understanding of the changes ahead. And, coming up with new tools, resources, and options to meet homebuyers’ needs could help families like the one that had such a powerful impact on my life.
Walter Scott is a senior economist for Fannie Mae’s Single-Family Credit Portfolio Management Analytics.