Editor's Note: This is part three of a three-part series on the changing demographics of mortgage borrowers. Read part one and part two.

Investors like Fannie Mae and Freddie Mac recognize that the people on the front lines can be their best resource.

That's why they're staging several pilots with lenders that seek to solve conundrums that make it hard to reach borrowers.

These include finding ways to lower down payments for borrowers with affordability challenges without taking on undue risks or increasing consumers' loan costs.

Not all these experiments will pan out, but the ones that do are worth it because they're a gateway to changing the process and allowing for product innovation in today's market.

Sometimes reaching underserved borrowers takes experimenting with changes to the mortgage finance system. And with the government-sponsored enterprises dominating the secondary market, that means getting Fannie Mae or Freddie Mac, along with their conservator, on board.

Fortunately, the GSEs encourage this, particularly when it comes to lowering down payment hurdles.

"We know there are going to be shifts in borrowers' needs in the future and we are going to stage pilots that are small scale in many cases to address that," said Mike Dawson, vice president of affordable lending strategy and policy at Freddie Mac.

While underwriting systems generally don't consider nonoccupant income in consumers' qualifying debt-to-income ratios, Freddie Mac is experimenting with doing so to help make properties more affordable to millennials with some lenders.

The pilot takes a concept some portfolio lenders are trying out a step further.

For example: Bank of America, after conducting a study of millennials' needs, recently started looking into whether it can bolster its origination volume by marketing and underwriting loans to renters who want to buy and lease space to their former roommates.

"If they've been roommates for a year and split rent we can use that in looking at qualifying income," said Kathy Cummings, a B of A senior vice president, noting that increased interest in renting private homes online has created greater comfort with the arrangements.

"For millennial buyers, we're letting them explore all the options," she said.

For any lender that tests out a concept, the experimental nature of the pilots is good to keep in mind. They may or may not fly, and even good ideas may end up not working because they're ineffective over the long term or at any degree of scale. And when the GSEs are involved, the pilots that do work will likely get shared with the broader market, eliminating any opportunity for an exclusive program.

For example, after piloting a cash-out refinance loan for homeowners to pay off student loans with Social Finance, Fannie Mae rolled out the product to all of its lender partners.

Quote
"We know there are going to be shifts in borrowers' needs in the future and we are going to stage pilots that are small scale in many cases to address that."
— Mike Dawson, vice president of affordable lending strategy and policy at Freddie Mac

Some pilots are modeled after existing GSE products, like partnerships between Wells Fargo and Fannie and Bank of America and Freddie to offer 3% down payment loans with more lenient eligibility requirements than the original HomeReady and Home Possible 3% down programs.

Other pilots bring a new approach to home finance, like CMG Financial's program that provides a crowdfunding platform for borrowers to raise the money for a down payment.

The further lenders can knock down the down payment barrier without jeopardizing borrowers' ability to repay and loan performance, the more consumers with affordability challenges they are likely to reach.

Saving for a down payment is a top homeownership obstacle, more than two-thirds of renters in a recent Zillow survey said. If that figure holds true across the 45 million U.S. households that the Pew Research Center estimates rent their homes, down payments could be a challenge for more than 30 million would-be homeowners.

The GSE pilots are also inspiring experiments between lenders and private investors. For example, Guild Mortgage and others are testing a 1% down payment mortgage, where the lender provides a 2% grant subsidy to create a 3% down payment loan. While Freddie prohibited the practice for loans it buys, the Guild program is modeled after Fannie's HomeReady program and the loans are sold to private investors. The idea stemmed at least in part from local insights.

"We heard from retail loan officers in those areas where it was an issue. That's a large factor in our decisions. We develop unique solutions for geographic problems, but in this case it made sense to do it nationally," said David Battany, an executive vice president at Guild.

Separately, Guild is also developing a shared equity program with the GSEs. While it's a promising opportunity, Battany advises lenders not to think a pilot is easy to participate in.

"Some people think Fannie and Freddie throw a pilot in your lap, but they tend to look for the lender to bring the idea to them," he said. "We spent a year plus researching it with multiple investors. They're looking for people who have done the work. It could be shut down or modified."

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