Anyone in the mortgage business can tell you: The "emerging markets" of immigrant, young, and minority home buyers are the cutting-edge challenge facing American lenders in 2004. On the one hand, many of these consumers have household incomes sufficient to qualify them to buy a house. They pay their bills, hold down steady jobs, and represent solid bets to perform well on a mortgage -- if they could only qualify for one.

The problem is that, using traditional rules for home loan qualification, these folks just don't make it. Their regular incomes may be supplemented with sideline sources of cash that are often hard to document or verify. Their national credit bureau files frequently are thin at best -- with too little data to even generate a FICO score needed to price a mortgage. They don't deal with standard banks, don't have credit cards, don't have a lot of verifiable savings or assets.

Leading mortgage market firms such as First American Real Estate Services, and the Fair Isaac Co., are working on programs that seek to translate such households' nontraditional financial profiles into credit-risk terms understandable by mortgage underwriters. Companies such as PRBC Corp. (Pay Rent, Build Credit), are attempting to create national databanks where individuals' rent, utility and other periodic payments are recorded and made available to lenders.

Now one of the country's largest mortgage lenders, Countrywide Home Loans, has come up with a program designed to remove most of the key barriers that keep renters who have good but nontraditional credit histories from buying homes. Countrywide began rolling out what it calls its "Optimum" loan program last week. Among its key features are a credit score proxy concept that translates borrowers' verifiable rent, utility, telephone, cable TV and other periodic payment histories into rough approximations of standard credit scores usable in an automated underwriting system.

For example, an individual with a minimal traditional credit history -- little or nothing in the files of the three national credit bureaus -- might have an abysmally low FICO score as a result. Or no score whatsoever. That, in turn, would normally prevent the borrower from qualifying for a mortgage, no matter what the rate. But under the new Countrywide approach, the individual's rent, utilities and other payment records could be used to create a FICO score proxy.

Dottie Sheppick, Countrywide's senior vice president for strategic products, says the firm's LandSafe Credit unit is now equipped to "substantiate nontraditional credit" data and produce a risk-evaluation rating analogous to a credit score, within 48 to 72 hours of application. The nontraditional credit analysis costs the consumer anywhere from $30 to $55. With the score proxy in hand, Countrywide can then give a "go" or "no-go" decision on the application. Fannie Mae is expected to buy most of the Optimum mortgages originated by Countrywide, according to Sheppick.

Other borrower-friendly features in the new program:

• It recognizes household income from hard-to-document cash sources, such as child care, cleaning services, auto or home repair. Traditional underwriting rules do not allow inclusion of such supplementary cash into household income computations for loan qualifying purposes.

• "Boarder" income contributions from household residents can also be recognized, unlike in traditional underwriting, provided the boarder has been making contributions for at least 12 months.

• Gifts and cash contributions by nonresident co-borrowers toward the mortgage applicants' assets on hand are treated far more liberally than in traditional programs.

• Downpayments can go as low as zero -- as long as the applicants can demonstrate that they have at least $500 in cash assets on hand.

Joe Anderson, senior managing director of Countrywide's Consumer Markets Division, said "many individuals and families have personal finances and situations that do no easily fit within traditional" standards for qualifying to buy a home. Realtors who specialize in working with immigrant, young, and minority home buyers know those problems only too well. Culturally-sensitive programs like Countrywide's – and others on the horizon from major lenders -- are likely to become key tools in helping "emerging markets" households to finally buy their first home, using their own credit histories, nontraditional though they may be.

Published: May 24, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.