Potential homebuyers seeking Freddie Mac-backed mortgages will no longer have to hunt for paper pay stubs to verify their income.
Freddie Mac announced on Wednesday that it will roll out an automated process that allows mortgage lenders to assess a prospective homebuyer’s direct deposit income. Freddie Mac claims this would reduce the paper documentation burden on borrowers, speed loan closing and simplify the lending process.
“Our direct deposit solution is an innovative, data-driven approach that takes minutes, not days to assess income so our clients can serve more borrowers more efficiently,” said Matt Vincent, Freddie Mac Single-Family vice president of credit and capacity. “Sourcing data directly from the mortgage applicant’s bank account increases accuracy, removes subjectivity, reduces manual underwriting errors and delivers a better experience for borrowers and lenders.”
Freddie Mac said that additional requirements and specifics — including the effective date for the new offering — will be in its March guide bulletin. The option will be available in Freddie Mac’s asset and income modeler (AIM), which functions within the GSE’s underwriting system, Loan Product Advisor, and automates parts of the manual process of assessing a borrower’s assets and income.
Requiring paper pay stubs is still often the go-to method for mortgage underwriters, and a Freddie Mac spokesperson said the majority of the mortgage market still relies on paper stubs for income verification.
But direct deposit is favored by the overwhelming majority of American workers. Out of about 35,000 individual workers surveyed in 2020, the American Payroll Association found that 94% received their checks via direct deposit. Freddie Mac hopes it can speed up the lending process by allowing lenders to tap into that data.
As the mortgage world becomes more technologically interconnected, the risks to cybersecurity, data and infosecurity increase. These risks should be top-of-mind for mortgage professionals, as evidenced by recent changes at Freddie Mac that emphasize risk mitigation and cybersecurity efforts.
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But to do so, they must separately establish an account with one of the third-party service providers that offer Freddie Mac’s direct deposit verification.
For the specific capability of verifying direct-deposit income, Freddie Mac said the initial service providers include Finicity, a financial data aggregator owned by Mastercard, FormFree, which provides data to lenders to assess borrowers’ ability to pay, and PointServ, which offers verification services for lenders.
Freddie Mac introduced its asset and income modeler in 2016, and in 2019 it started using tax return data to automate the income calculation process. At the time, Freddie Mac said the capability would free underwriters from doing busy work and allowed them to “focus on the big-picture credit profile of a borrower.”
AIM also extracted pertinent tax data, automating at least part of the arduous process of assessing self-employed borrowers’ income.
Freddie Mac claims that top performing lenders are more likely to automate the underwriting process, and doing so helps them close loans more effectively. A 2020 study by the GSE found that the top quartile of lenders, based on their closing cycle time, are more likely to build their processes around automated offerings.
Across the board, lenders who originate mortgages with “digital offerings” were able to shave nine to 10 days off their time to close, on average, the study found.
Fannie Mae has also taken steps to expand automatic verification of income and asset information. In June 2021, Fannie Mae told mortgage servicers they could start using third-party vendors to verify the information that borrowers provide in their Covid mortgage assistance application.