Working in the housing market can often be about big numbers. Millions of homes, billions of dollars, decades of monthly payments. But there’s one area of Freddie Mac that is increasingly about a very small number. In fact, it’s less than one percent.
It’s true, less than one percent of loans Freddie Mac has financed over the last decade are currently seriously delinquent. This extraordinarily low number is the direct result of our company’s sophisticated automated underwriting system (AUS) Loan Product Advisor®, and its ability to help lenders assess the risk of borrower mortgage default.
Loan Product Advisor is the backbone of our company’s safety and soundness and allows us to make good on our commitment to help lenders promote responsible lending in primary mortgage markets — creating millions of new creditworthy homeowners. We are continually working to further leverage our technical expertise to try and bring that seriously delinquent number down ever further.
How do we do it?
It starts with the recognition that qualifying for a mortgage takes hard work and a serious commitment on the part of the borrower. Even the most diligent prospective homebuyer may struggle with inconsistent language used across different forms, may have some missing records and may provide lenders with information that is difficult to accurately transcribe. For lenders, this means that borrower-supplied information can sometimes pose challenges.
At Freddie Mac, we’re tackling these challenges by leveraging advanced data analytics so our clients — lenders across the country — can more fully digitize the application process. Instead of asking for documents, we’re enabling lenders to obtain a borrower’s permission to directly access his or her digital data straight from the source — and then using it to accurately determine capacity to repay the mortgage. This allows lenders — and ultimately Freddie Mac as the loans’ purchaser — to manage risk using verified source data at the very beginning of the mortgage process so they can responsibly provide mortgages to creditworthy borrowers.
Loan Product Advisor asset and income modeler (AIM) is Freddie Mac’s solution that helps automate the manual lender process of assessing borrower assets and income to reduce documentation requirements and more broadly speed up loan origination and underwriting processes. AIM leverages the expertise of third-party service providers to access borrower asset and income data to help determine a borrower’s capacity to repay a loan. It also helps deliver process efficiencies and allows for potential relief from Freddie Mac’s enforcement of certain selling representations and warranties related to assets and income.
The importance of AIM cannot be overstated. Verified data greatly reduces the chance of manual data input errors, helps remove subjectivity from capacity assessment and facilitates the embedding of Freddie Mac's investor risk metrics in that calculation every time. It reduces the opportunity for fraud or inaccuracy. And it’s faster for lenders, easier for borrowers and provides greater transparency for investors.
Additionally, seeing a history of regular direct deposits provides greater insight into a borrower’s ability and capacity to handle a mortgage payment, as does looking to see what’s left over at the end of the month. Looking for consistency in level of income across recent paystubs or a W-2 form also remains critically helpful in assessing a borrower’s ability to repay. And AIM is evolving to take advantage of this data. Our most recent AIM enhancement assesses income by combining paystub data with direct deposits from a service provider report and compares it to the loan data submitted to Loan Product Advisor.
In short, verified data helps our lenders quickly and efficiently serve borrowers in a way that minimizes underwriting risk to lenders and Freddie Mac, while helping families achieve sustainable homeownership.
In fact, AIM has even greater utility in reducing the level of risk the company faces by enhancing our pioneering credit risk transfer program, through which we transfer a significant amount of risk on single-family mortgages outside the company to private investors and (re)insurers. Here too, verified data increases the quality and transparency of the loans we guarantee, which is key in our ability to transfer this risk. We recently surpassed $50 billion in credit risk transfer on single-family loans we guarantee.
This isn’t new at the company. Freddie Mac has been part of mortgage digitization for over a decade now (we began accepting electronic loan documents in 2006), and today we offer a number of services to help lender clients of all sizes bridge the digital divide free of charge. And the increasing use of verified data in the mortgage approval process is helping us keep that mortgage delinquency rate number extremely small. In fact, it’s the smallest number we know.
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