Guild pushes GSEs to scale residual income analysis

Guild Mortgage is advocating for Fannie Mae and Freddie Mac to adopt residual income analysis at scale through ongoing conversations and data sharing.

The California-based lender has used this model since 2022 in its “Complete Rate Program” that’s available for government loans. Because Guild retains servicing and issues the loans in Ginnie Mae pools, the company is able to set its own risk-based pricing grids.

But Guild believes the program has the potential to gain scale under the umbrella of the government-sponsored enterprises (GSEs), allowing the industry to stop over-reliance on credit scores, according to David Battany, the company’s executive vice president of capital markets.

While Fannie and Freddie have taken steps to incorporate rent and utility payment data and cash flow information into their underwriting systems, Battany characterized the moves as “baby steps.” The GSEs also recently removed the minimum 620 FICO score requirement, which he views as a significant step.

Guild could deliver residual income loans to the GSEs, but doing so would mean receiving “the bottom of their risk-based pricing grid, the worst possible,” Battany noted. The GSEs did not immediately reply to HousingWire‘s requests for comment.

The limits of credit scores

Battany pointed to a Federal Reserve Bank of Kansas City study that found younger, lower-income and minority homebuyers disproportionately have lower credit scores. This is often due to a lack of access to financial mentorship rather than poor financial behavior, he added.

“Credit scores are very powerful, predictive and an important tool for credit risk, but we can’t over-rely on them,” Battany said. “One of the big gaps we have as an industry is if a person walks in the door to apply for a loan and they have three accounts for three years and a very low score, we think they are the same as a person who had a lot of late payments. Rather than saying they’re a high risk, they should be an unknown risk.”

For nearly one-third of the population without available data, the traditional combination of a credit score and a loan-to-value (LTV) ratio falls short, he said.

Guild’s approach

To address this gap, Guild developed a residual income analysis that examines a borrower’s actual take-home pay against their real nondiscretionary expenses over a 12-month period, utilizing electronic bank data from vendors like FormFree.

The lender looks for a residual income ratio of at least 110%, meaning the borrower’s take-home pay exceeds all nondiscretionary expenses — including housing, utilities and transportation — by at least 10%.

The industry’s standard debt-to-income (DTI) ratio compares gross income to debt. Limits can reach 45% in manual underwriting or up to 50% in automated systems, and they represent a single point-in-time snapshot, Battany said. Guild’s 12-month approach captures seasonality, bonuses and variable expenses.

When analyzing risk, Guild studied roughly 3,000 loans originated between 2015 and 2021. The lender found a strong correlation between the residual income ratio and loan performance, with default rates very similar to the broader industry average.

Borrowers who utilize Guild’s program represent the exact same population that would pursue manual underwriting at any other lender, Battany explained.

The primary hurdle is that while Guild can pull digital bank data instantly, current rules still require hundreds of pages of paper PDFs to be collected for eligibility. The burdensome process deters both borrowers and loan officers. And many eligible homebuyers never apply because they are told by friends, family, real estate agents or loan officers that their credit isn’t good enough.

Consequently, Guild’s program accounts for a “super small amount” of its overall business — less than 1%, or just a few dozen loans annually, Battany said. This friction is the core tension the lender is attempting to resolve by pushing the GSEs.

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