The landmark housing bill winding its way through Congress could change the banking system and make it easier for small banks to return to mortgage lending.

The House and Senate announced a compromise for the 21st Century Road to Housing Act this week. They’ve settled on 45 provisions across 381 pages with major implications for housing. This comes after months of wrangling for a bill that ultimately ends up with all sides meeting in the middle.

Rep. French Hill (R-Arkansas), chair of the House Financial Services Committee, said a late compromise on the bill involved settling on some bank deregulation provisions favored by the House.

“I appreciate the Senate including a three-year sunset on the [Community Development Block Grant Disaster Recovery] program and adopting key House priorities including nine community banking bills and the House’s language limiting institutional investors from outcompeting American families in the housing market,” he said.

In the end, nine of 12 House banking provisions made it into the final bill. Many of these consider the current state of banking, especially as smaller banks have reduced their roles in the market.

Explains Realtor.com® senior economist Joel Berner, small banks are a rarer sight in mortgage lending these days, thanks in part to stringent compliance rules imposed following the Great Recession.

“They don’t have the armies of compliance officers that large banks do. Similarly, technological capabilities are easier to wield at larger scale,” Berner said. The infrastructure required to process a loan application in hours is expensive, so larger players tend to dominate the space.

Bill reshapes rules for community banks and credit unions

The Bipartisan Policy Center broke down the House’s intent for community banks, which was initially section 900 of the bill. Dennis Shea, chair of the BPC’s J. Ronald Terwilliger Center for Housing Policy, said the rules could help banks provide more construction lending as well as mortgages.

“[French] Hill has always viewed these bank rules as a housing concern,” Shea told Realtor.com.

Several of the sections deal with how much money banks need to keep as a reserve, and deal with how to define some kinds of money on their balance sheets. They involve “brokered deposits,” or those that are aggregated from investors and distributed to banks.

Other rules allow more smaller banks to go through rigorous examinations from regulators less often. The boards of some well-run credit unions won’t have to meet every month under the new law.

And, the bill aims to promote bank startup activity, especially in rural areas. “De novo” new banks are exceptionally rare since the Great Recession.

The Senate kept out three provisions sought by the House. One would reduce the Federal Reserve banks’ surplus fund cap by $115 million.

The other two involve how the Federal Deposit Insurance Corp. deals with failing banks. One involved the “least-cost” rule and the other creates exceptions to bank concentration limits in the event a bank was in default.

Balancing consumer savings against financial safety nets

For much of this year, congressional Republicans and the Trump administration have been building momentum to change and rescind banking rules. Many of those emerged in the wake of the subprime mortgage crisis and were codified in the Dodd-Frank Act and the Basel III accords.

Those changes added a set of new rules that Republicans say have chased smaller banks out of the housing market.

Banks originated about 60% of mortgages and held servicing rights to about 95% of mortgage balances in 2008, according to data from the Financial Stability Oversight Council. By 2023, banks originated just 35% of mortgages and serviced about 45% of balances.

Says the economist Berner, the market has changed since then.

“Nonbank mortgage lenders have made access to mortgage credit easier for more borrowers,” he said. “They tend to be more technologically advanced than banks, and allowed for all-online experiences sooner. They also extend mortgage credit to borrowers with thinner or weaker credit files than banks do, allowing for more approvals.”

Lawmakers have emphasized that the financial system is much changed since the Great Recession, and new guardrails are in place. Berner noted that some of the rules, especially ones that require more security for banks, still safeguard the financial system.

“It’s not just cutting down on paperwork, it’s cutting down the buffers that hedge against massive liquidity crashes in the mortgage market,” Berner said of the proposed reforms. “Those capital requirements help prevent catastrophe when the market takes a sharp turn for the worse.”

“Deregulation creates risk, but it may also allow banks to offer more competitive rates to borrowers if they choose to pass the savings along to their consumers,” Berner said.

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A government change could tip the scale for millions of “credit invisible” Americans and bring hundreds of billions in mortgage loans.

In a rule change finalized last month, government-run mortgage giants Fannie Mae and Freddie Mac said they would accept mortgages underwritten with a credit score model that takes on-time rental payments into account.

VantageScore, the company behind the credit scoring system, estimates that including rental payment history allows about 7.7 million Americans to boost their credit score above 620, potentially making them eligible for traditional mortgages.

Additionally, the company says this approach improves risk prediction by identifying up to 11% more defaults in the riskiest score ranges, potentially reducing the rate of future defaults.

The change “could make a difference for a small but growing share of borrowers: freelancers, self-employed households, gig workers, or young people and immigrants with good, reliable cash flow but a thin credit file,” says Realtor.com® senior economist Jake Krimmel. “They are are probably qualified as a whole, but not on paper under the current rigid, outdated system.”

Here’s what has changed

Fannie and Freddie buy whole loans from mortgage lenders to package as securities for investors, and the rules they set for eligible “conforming” loans have major influence on the market.

U.S. Federal Housing Finance Agency Director William Pulte, who also oversees Fannie Mae and Freddie Mac, announced April 22 that they were expanding a pilot to allow mortgage lenders to use VantageScore ratings to assess borrower creditworthiness, in addition to or instead of traditional FICO 10T scores.

VantageScore is a scoring model developed by the three major credit bureaus, Equifax, Experian, and TransUnion. They operate it through a joint venture called VantageScore Solutions LLC. Its “trended data” takes into account rental and utility payment history reported to the bureaus.

Montana-based credit scoring mainstay FICO now also considers positive and negative rental payment history reported to the agencies in its FICO 10T.

In the announcement, Pulte framed the change as a modernization of consumer credit. Late rent and utilities payments can negatively impact credit scores, so the lack of a positive impact from payment history was “nonsense,” Pulte said.

The National Association of Realtors® and the Mortgage Bankers Association applauded the move as a modernization of credit reporting.

Tipping the scale for the ‘credit invisible’

Last year, only about 13% of renters benefited from positive rental payment history in their credit reports. California, Colorado, and New York have already enacted programs for rent reporting. Nine other states have considered legislation.

VantageScore Solutions believes almost 7.7 million Americans would see a boost to their credit if the model went nationwide. And it also believes that data helps better predict who will default and who won’t.

Young consumers’ average credit scores rise by 67 points. But some boosted by as much as 100 points, said VantageScore Chief Economist Rikard Bandebo.

The model “allows borrowers to demonstrate responsible financial behavior that legacy credit scoring models currently overlook,” Bandebo said.

In a study VantageScore conducted on 600,000 people last year, it found that about 10% of the 77 million credit-relevant renters in the country would benefit from updating the credit score. For these Americans, adding rental payment history would result in a score of at least 620, making them mortgage‐eligible under current government-sponsored enterprise (GSE) guidelines.

In fact, a fraction of these renters are “credit invisible,” meaning outside of rent history, they have no credit at all under traditional metrics. VantageScore used this data to estimate that there’s a market opportunity of 2.1 million households and $777 billion in new mortgage volume.

At the same time, positive rental payment scores could identify 11% more defaults and a 3.7% predictive lift. As Pulte said, rental payment history is indicative of mortgage payment history, giving banks a better idea of a person’s risk.

Mortgage lenders embrace the change

Pennsylvania-based mortgage lender Newrez, which originated the first $10 million in loans using this data, found the process could run very similar to its normal lending process, said Bob Johnson, head of originations at the company.

That “validated” the idea that a new credit score model can be applied using the same processes. Paired with “strong controls and underwriting discipline,” the new model provides a more holistic view of a person’s credit, Johnson said.

And it proved that Newrez’s initial experiment, or “limited engagement,” is scalable.

“For consumers, the takeaway is straightforward: Consistent on-time payment behavior across a wider range of obligations can now show up in a credit score in ways it often did not under the legacy models,” Johnson said. “That is particularly meaningful for thin-file and previously unscoreable borrowers.”

In an April 29 call, Fannie Mae acting CEO Peter Akwaboah said the move would “support affordability and access through industry innovation and competition.” Fannie Mae provided $116 billion in liquidity to 385,000 households in the first quarter. It didn’t share further details of how it would incorporate VantageScores.

An increasing number of mortgage companies have joined in. Michigan-based United Wholesale Mortgage announced April 29 it would begin accepting FICO and VantageScore, for instance. Department of Housing and Urban Development Secretary Scott Turner said it would follow with VantageScore usage “soon.”

Assessing potential risks

The economist Krimmel says that modernizing the credit scoring criteria in this way will help people with steady income but who may have a thinner credit history.

“There is some risk, though,” he says. “FHA delinquencies have increased, though that could partly reflect the fact that these ‘right’ marginal borrowers are being shut out while the wrong ones slip through.”

Still, the change happens at a time when young people are overwhelmingly pessimistic about the housing market. They blame a variety of factors, including a lack of housing supply driving up prices. Given economic uncertainty and high interest rates, the credit formula is just one factor in the larger housing puzzle.

“Most importantly though for downside risks, the economic backdrop is somewhere between uncertain and unstable,” Krimmel said. “Policies expanding the credit pool are only as sound as the labor market supporting it.”

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