Using Rental Payment History in Mortgage Underwriting Is a Promising Strategy to Close the Black-White Homeownership Gap

FHLBank San Francisco and Urban Institute collaborate on research examining ways to advance racial equity in homeownership and wealth-building

SAN FRANCISCO/WASHINGTON, D.C., Oct. 17, 2022 – More Black renters could become homeowners if the housing finance industry more fully embraces the use of rental history and other alternative data in underwriting mortgages. 

The technologies and developments required to make this a reality, however, are just beginning to emerge. Transparent, large-scale pilots are needed to ensure that the data is used appropriately and efficiently, and many housing finance actors will need to summon the will to ensure the changes are equitable. 

A comprehensive new report from the Racial Equity Accelerator for Homeownership—a collaboration of the Federal Home Loan Bank of San Francisco (FHLBank San Francisco) and the Urban Institute—examines the current mortgage lending landscape and analyzes how Black households could benefit from the adoption of alternative data, specifically rental payment history, without increasing the amount of risk lenders take on. 

"Communities of color face structural and systemic barriers that exclude many from homeownership in America," said Teresa Bryce Bazemore, president and CEO of FHLBank San Francisco. "There's a critical need to better understand these barriers so they can be removed, and this research from Urban Institute represents a roadmap for addressing the knowledge gap while pushing the mortgage finance industry to enact tangible solutions that ensure equity in homebuying."

Reducing the Black-White Homeownership Gap through Underwriting Innovations: The Potential Impact of Alternative Data in Mortgage Underwriting reports that there is a 30-percentage point gap in homeownership between Black and white households in the United States. The gulf is wider now than it was in 1960, before federal law explicitly prohibited race-based housing discrimination.

"Our analysis shows that the black-white racial homeownership gap will persist or even widen unless stakeholders design and implement intentional innovations in mortgage lending," said Janneke Ratcliffe, Vice President of Urban's Housing Finance Policy Center. "The data suggests that Black households are disproportionately harmed by current underwriting models but they could receive disproportionate benefits from including other data in mortgage underwriting, if these innovations are done right."

A significant barrier facing prospective Black homebuyers is credit score. But approximately 53 million people cannot be reliably scored under the scoring model most commonly used in mortgage underwriting, Classic FICO. Black households are disproportionately likely to lack traditional credit data to derive a FICO score and are more likely to have FICO scores below 620, which is the typical cutoff for mortgage approval.

The report asserts that heavy reliance on credit scoring, and the automated credit history data that undergirds the system, "discriminates against people of color through process, not just through risk assessment. The automated process strongly favors applicants with easily documentable strong credit records, while those whose credit history might be confirmed with further effort and documentation are usually shut out."

Mortgage underwriting might be safely expanded by including information that was once used to evaluate applications – such as rent and utility payments and cash-flow data – but that is not commonly captured in current automated models. This information could be incorporated into automated score models, or it could be evaluated as a separate step in underwriting. In their analysis of 2020 mortgage data, the report's authors determined that 18.6 percent of Black applicants, and 18.1 percent of Hispanic applicants who had been denied a first-time mortgage could be approved if 12 months of on-time rental payments were included in the underwriting process.

While momentum is rising for this approach, more study is needed to ensure the data is collected safely and securely, standardized across systems, and strong consumer protections are in place.

The most influential factors that determine mortgage access reflect a long history of racial discrimination by US public and private institutions. Continuing to rely on current lending criteria reinforces and perpetuates the disparities that discrimination created. 

"Structural racism has prevented people of color, and Black people in particular, from having equal access to educational opportunities, high-paying jobs, and intergenerational wealth," the report notes. Incorporating alternative data in underwriting is an important step forward—one of many needed—in the effort to achieve racial equity and increase Black homeownership.

The report is the first in a series of four developed through a two-year, $1.5 million collaboration between Urban Institute and FHLBank San Francisco. Each examines advancements in mortgage finance that can facilitate and sustain more equitable homeownership. Forthcoming research will address the use of new technologies to overcome historical biases, student loan debt, and new product structures that can better support homeowners who experience temporary financial hardship.


About the Federal Home Loan Bank of San Francisco

The Federal Home Loan Bank of San Francisco is a member-driven cooperative helping local lenders in Arizona, California, and Nevada build strong communities, create opportunity, and change lives for the better. The tools and resources we provide to our member financial institutions–commercial banks, credit unions, industrial loan companies, savings institutions, insurance companies, and community development financial institutions–foster homeownership, expand access to quality housing, seed or sustain small businesses, and revitalize whole neighborhoods. Together with our members and other partners, we are making the communities we serve more vibrant and resilient.

About the Urban Institute

The nonprofit Urban Institute is a leading research organization dedicated to developing evidence-based insights that improve people's lives and strengthen communities. For 50 years, Urban has been the trusted source for rigorous analysis of complex social and economic issues; strategic advice to policymakers, philanthropists, and practitioners; and new, promising ideas that expand opportunities for all. Our work inspires effective decisions that advance fairness and enhance the well-being of people and places.