Mortgage originations among self-employed households have fallen more than for salaried households. This decline has occurred even though self-employed persons earn more on average than salaried workers. Here we discuss several factors that influence this reality and what it means for potential homeowners and lenders.

Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

The mortgage market is not adequately meeting the lending needs of the millions of self-employed households, according to a new brief from the Urban Institute.

The non-partisan think tank found that while mortgage use has declined along with the nation’s home ownership rate, usage among self-employed households has fallen more than for salaried households. And the decline has occurred even though self-employed persons earn more on average than salaried workers.

The factors

The report by the Washington-based non-profit found that there are several factors for the decline in mortgage originations among self-employed persons. Among them: They were hit harder by the recession than any other group, and still haven’t recovered as fully as salaried workers. Indeed, their incomes are still below pre-crisis levels, even as incomes for salaried people have largely recovered.

But, it adds, “factors beyond incomes – such as tougher mortgage availability or requirements – are likely at play.”

No one knows for sure exactly how many people are self-employed. But in 2016, according to the Census Bureau, about 8.5 percent of all households were headed by someone who worked for themselves. And 3.4 percent more were run by someone who was salaried but also earned some income from self-employment, according to a Federal Reserve study.

That totals almost 12 percent, or about one in every eight of the country’s 126 million households are self-employed.

A big chunk of these people work in the so-called “gig” or “on demand” economy. A gig, which is a term that was coined by the Beat Generation to describe their musical performances, refers to any type of short-term job. There are hundreds of possibilities, from being an Uber driver to being an on-call accountant. And many are paid in cash or even under the table.

What the lenders say

According to a Fannie Mae survey released last spring, nearly one-fifth of all Americans have provided a service through the gig economy. But the income they received for their services was less stable than that of salaried workers who receive regular paychecks.

In another survey — this one of senior mortgage executives — Fannie also found that applications for financing are on the increase by would-be borrowers who claim some gig income. Indeed, nearly nine out of 10 of the lenders expect the number of gig borrowers to grow over the next few years.

But, these lenders also admitted, it is tough to use gig income to approve applicants because of the unpredictability and instability of their incomes, investor requirements and underwriting criteria. About a fourth of them said easing self-employment income verification rules should be eased.

Both Fannie Mae and its sister secondary market company, Freddie Mac, are looking at the problem. Though neither outfit is ready to discuss their initiatives in any great detail at this point, Fannie is taking a hard look at its underwriting standards and such emerging technologies as application program interfaces and artificial intelligence that could automate the income verification process for gig workers.

“Understanding how gig income borrowers and other self-employed borrowers are paid and how they report their incomes on their tax returns could help inform ways to streamline the verification and risk assessment process,” vice presidents Jude Landis and Malloy Evans said in the report.

For its part, Freddie Mac also is looking into new technologies, specifically optical character recognition (OCR).

It is working with LoanBeam, a company which can turn PDF files representing multiple income streams into a single, easy-to-read cash flow analysis that aligns with investor guidelines.

LoanBeam’s OCR technology has been developed over the past 14 years. It has been tested by scanning millions of tax documents, with a 99.7 percent accuracy score.

Without getting too technical, the program extracts and ingests data from tax documents, searching for relevant data points that provide lenders with a complete income snapshot of the borrower. It then reports its findings in workbook format, customized based on lenders’ needs and guidelines, so they can quickly and accurately determine qualifying income.

If everything works out as hoped, Loan Beam’s technology will be integrated into Freddie’s automated underwriting system.

Meanwhile, here are some other sobering stats regarding self-employed people from the Urban Institute report:

  • The median income of self-employed individuals was $66,900 in 2016, $10,800 greater than the median of $56,100 across all worker categories. But the difference was still less than the $16,500 gap between 2001 and 2007.
  • Considering the difficulty in obtaining financing, it is somewhat surprising that self-employed households have a higher degree of ownership. In 2016, 72.9 percent of self-employed individuals owned, compared to 62.7 percent of salaried households.
  • The ownership rate plunged during the Great Recession for both groups, but the bigger drop was among self-employed households. Ditto for mortgage use among the two groups.
  • Prior to 2007, homebuyers in both groups were just as likely to carry a mortgage as anyone else. But after that, mortgage use declined among self-employed individuals to 67 percent vs. 74 percent for salaried folks.

Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

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