It’s time for a new risk model for mortgages

You can be trusted with rent for decades and still be treated like a child by complete strangers when you try to buy a house

If you’re part of #generationrent, you might know what I mean: we simultaneously want houses and the tiny piece of security they represent and loathe an industry that hasn’t been disrupted since 1987 but still feels qualified to make moral judgments about whether you’re worthy of owning your own home.

If you’re not familiar with this feeling, let me quickly explain how renting works in most developed countries:

  1. You pay rent on progressively more expensive places, on time or mostly so, for 10 or 15 or 20 years.
  2. You do this through a variety of job changes, relocations, side hustles, and economic changes (kids, health issues, car breakdowns, divorces, marriages, wars, business failures, pandemics, depressions, and economic crashes).
  3. You do this while carrying student loan debt, credit card debt, and auto debt.
  4. You do this, usually, while working more than one job.

See, with renting, it’s fairly straightforward: when you go to a new rental, they ask you to fill out some forms, usually online. They call your last landlords, they check your credit, sometimes they run a background check.

As long as you’ve never been evicted or been to jail — which is a whole different conversation — and the last place didn’t have to chase you down for rent, you’re usually good to go, even with bad credit or bankruptcies or student loans. You put down a deposit, usually a month or two of rent, and they hand you the keys.

Pretty simple, right? Everybody needs housing, and as much as I bitch about renting I am grateful to be able to access it wherever I am.

But at some point, after 10 or 20 years, you will realize that somehow, you are paying more for rent than you would be to own a place. Wow! you’ll think to yourself. I can save some extra money and have my own space? Cool!

You’ll go with confidence to a mortgage lender to talk about your options. It can’t be that bad, right? You’ve never missed a rent payment, rent is actually $600–1,000 higher per month than comparable mortgages in your market, and surely a good record of paying on your largest expense will help.

Do not believe them when they tell you it is easy. You will only be disappointed.

(Unless you are actually a unicorn who has held the same full-time job for 20 years since the day you left college with no student debt, credit cards or medical bills. In that case, you should go read this other article about displacement and gentrification before you buy.)

Here is what actually happens when you go to a mortgage lender:

  1. You walk in and say, ‘I make XX a year with these three jobs and I’ve paid my rent on time for 18 years and I really want to buy a house and I can probably scrape together a 5% down payment. Yay! Let’s hang out!’
  2. They look at you like you’re crazy because:- You’ve had multiple jobs in the last ten years. (This is a bad thing, believe it or not. Will explain.)- You have debt. (Again, um, what planet do you guys live on? I wanna go there!)- You freelance or have multiple income streams. (Yes, I know. How wild to be told to diversify all your life only to be looked at like you’ve walked in dressed like a unicorn when you have healthy side streams.)- You’ve been paying twice as much in rent but can’t hand them $40K to make them feel better about you paying half that in mortgage payments.
  3. To get you out of their office so they don’t have to see the crazy person anymore, they’ll ask you for paperwork. All of it. Three to six years of bank statements and tax returns. Custody agreements, divorce papers, personal references. Business plans, P&L’s, tax forms. Identification documents for everyone in your house, copies of medical bills and credit card statements. Suddenly, they have access to everything about you, and they can demand anything they want.
  4. Just FYI, you probably can’t upload most of this, or even put it on a thumb drive or — gasp! — a CD. You may even have to figure out how to use that free fax shit on the internet or actually kill trees for paperwork no one will ever read again.
  5. After six months of hurry up and send paperwork and then radio silence for weeks on end, they’ll tell you you’re finally qualified, for something generally $200K below the average house price of everywhere within a 2 hour drive of your workplace / your kids’ school / general civilization. On the way out they’ll tell you that, by the way, you’re a high risk customer so you’ll need to put down 20%.
  6. Oh, and the deal is only good for 30 days, so good luck and don’t come back!

Banks see multiple income streams as a risk — especially after COVID — so if you are employed in multiple gigs, there are going to be even more paperwork restraints on you, and your income is going to be averaged down. But if you ask anyone under the age of 45, they will tell you — our lives have taught us the hard way that it’s much riskier to trust one job to keep you employed, never lay you off or downsize, and always pay you a little more each year. Trust us. We know.

Banks see your debt-to-income ratio as the golden standard of what you’re able to afford. They base this on a 42-year-old model that ‘no more than 30% of your income should be spent on housing,’ and that between 36–40% DTI is the least amount of risk.

I’m sorry, but no one I know lives like that. You literally can’t rent housing in this country for 30% of your income at almost any level (at least, not without those pesky income streams). Also, whoever calculated that damn DTI window did it before student loans were a thing.

The bank looks at you in your unicorn suit not because they’re assholes but because for the last several decades those questions were the real risk measurement.

Nothing in the current mortgage model makes rational financial sense in 2021.

Banks are still operating on a risk management model from three or four decades ago, when the American dream was a very different place.

Their model is based on a time when people could get jobs that lasted until retirement with just a high school education. It’s based on a time when families could live comfortably in single-income households, when both earners didn’t carry student debt their government gave them the day they came of age. It was also a time when vast swathes of the population didn’t have their careers disrupted by wars or economic depressions or pandemics.

A modern mortgage model would take a hard look at the real risk management systems of today. It would do many of the things landlords already do when they’re looking at tenants. It would look at things like this:

  1. Anyone who’s paid rent on time — especially when that rent is at or above the mortgage value of a comparable home — should have a housing credit score that shows exactly what they’re capable of paying and for how long.
  2. Anyone with multiple income streams goes to the top of the list. (I do not know how else to tell you this, but anyone who doesn’t live like that, after the disruption of the past twenty years, is either an idiot or already set for life. If the former, you probably shouldn’t loan them money, like it’s an award for sticking with the same terrible job and managing to not be made redundant during any of the aforementioned crises and basically is like a gold star for participation without showing any actual resilience.)
  3. The faster and more efficient technology can make these processes, the less it will cost to sell or buy a house and the more money there will be for down payments and loan payments. (Can we please stop canceling things like Pluto and start canceling the fax machine already?)
  4. If you’ve been consistently paying above what your mortgage will cost on a monthly payment, your down payment can be reduced. If a down payment is risk mitigation, yet you have a demonstrated history of paying $500–1,000 more per month for several years — which is why you can’t save $60K for a down payment! — that can be counted as a substitute, if you will, for that traditional risk mitigation.

I know this idea will radically offend the bootstraps crowd, but let’s get real, here: we haven’t been in a bootstraps economy for at least twenty years. Please refrain from the whole ‘well, if you can’t qualify for a mortgage it’s all your fault and you’re obviously an irresponsible human who doesn’t deserve thirty years of a bank’s trust.’

First, actually, it’s the banks that don’t deserve your trust (ahem, 2008, ahem).

Second, there is no moral judgment you can make on someone who has been paying their rent AND their debt and all their other bills (often with multiple jobs, ingenuity, creativity, and a work ethic that would kill your old white self). There’s no actual argument here — especially if you want to talk about bootstrapping your way to a better life. If your rent payment history counted for anything, most of those who wanted to could buy a house. Period.

Maybe, instead of pushing moral judgments and outdated models on people who are making the best of uncountable bad situations, we could step back and see that it’s time to change the model, to bring the 21st century to mortgage lending and risk management.

It’s not a sexy field, but it’s one that would change the lives of millions around the world. Let me know if you decide to take it on — I’ll be over here in my rental, sorting 200 pages of printed paper in the living room floor.

Photo by Tierra Mallorca on Unsplash. I’d bet it’s one of the most used photos on the stock internet catalog this year.