Opening Up Mortgages For Gig Workers

While freelance and self-employment has existed as long as the work has existed, half a decade can make a big difference. Gig workers have gone from a sliver of the economy to a bonafide force, powered by platforms like Uber, Lyft and Fiverr, not to mention a generation of millennials who had the misfortune of entering the workforce during the Great Recession and resultant unemployment wave. For many, gig work isn’t a side hustle – it’s the whole hustle.

By the numbers, care of the PYMNTS/HyperWallet Gig Economy Index, 35 percent of today’s workforce participates in what we now call the gig economy, a figure that some experts believe will increase to as many as 50 percent over the next two years. Moreover, gig work has now become the majority form of employment for gig workers: 53 percent of gig workers do not have 9-to-5 jobs, as opposed to the 47 percent of gig workers who do. And that change is notably recent, as in Q1 2018, 55 percent of gig workers had full-time day jobs.

Among workers, over 37 percent noted that they receive at least 40 percent of their income via gig work, accounting for some $1.4 trillion of total U.S. personal income in 2018.

In short, the gig economy and its workers are already a large and important part of the world of work, and becoming a larger part by the day. For workers who want to achieve flexibility, self-determination and greater control of their professional lives while also making an honest living wage, various digital marketplaces have been a boon by connecting them to work. There are downsides to that, however, such as not knowing exactly where or when one’s next job will be – but for many workers, the flexibility of the work balances out that issue.

But unfortunately, it’s not much of a boon for self-supporting gig workers who also want to be homeowners. Because as of today, the world of mortgage underwriting isn’t built for gig workers or the self-employed, thus making it challenging for those looking to dip in a toe.

Because the mortgage system – largely built around the qualified standards that require proof of steady, long-term employment backed by W2s and tax forms – doesn’t necessarily mesh with the professional lives of gig and self-employed workers.

That’s the bad news. The good news for gig workers is that the situation may be changing, as there is a rare bipartisan push on Capitol Hill to open up the underwriting for gig workers and other self-employed professionals.

The New Rules

The mortgage underwriting process – particularly in the world after the Great Recession – is very geared toward applicants who have easily documented and verified income, backed by pay stubs, W2s, tax receipts and at least a two-year track record of continuous employment (preferably with a single employer) earning at a certain target level.

Accessible – though not always easy – for the average W2 worker, but extraordinarily difficult to clear for workers who live outside that mold, such as gig workers, those with seasonally unbalanced income and entrepreneurs. The mortgage system isn’t designed to look at the kind of data that gig workers produce, or to best incorporate it into an evaluation of a potential borrower.

“We can absolutely use the wealth of data we already have about gig workers to develop models around it managing the risks of volatile income. No lenders want to turn down a Lyft driver who is bringing in more than the median income monthly with a strong credit score and a reasonable cash down payment,” an executive whose firm specializes in digital underwriting told PYMNTS.  “But if there is no way to fit an income pattern into the boxes mandated by federal qualified-mortgage (QM) regulations dictated by Fannie and Freddie, they can’t underwrite the loan.”

These consumers can still find products: Non-qualified mortgages exist, but the terms won’t be as favorable. And the problem, he noted, is one of documentation – the current QM standards accept only a very narrow range of documents as verification of income.

The new regulations, the Self-Employed Mortgage Access Act, co-sponsored by Democrat Mark Warner and Republican Mike Rounds, are design to remediate the problem by expanding the range of sources lenders can consider permissible for income verification, beyond the rather short and narrow list offered in the current QM standards.

“Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income — pay stubs or W2s — as someone who works 9 to 5,” Senator Warner noted while introducing the bill in early September.

Fixing an Over Correction

The problem, lenders note, is one of overcorrection in the market. In the pre-2008 world, there was a genuinely failure in underwriting and risk assessment, as banks handed out mortgage loans to people who could not afford them. The reasons are complex, but at least one prominent factor was the proliferation of “liars’ loans” that allowed consumers to fill in their income figures without having to document much of anything when applying for a mortgage.

Such a system is not what people mean when they talk about opening up the verification process to be more inclusive.

“The goal is not to give loans to people with no money. No lender wants to do that. This is about consumers who have money, who are employed and who absolutely have demonstrated that they are candidates for homeownership.”

And the movement to make mortgage loans more accessible to consumers who are partially or primarily employed in the gig economy isn’t just legislative.

Fannie Mae and Freddie Mac are both reportedly exploring ways to bring more self-employed and gig-economy applicants into the mortgage markets. A Freddie Mac official speaking to The Washington Post noted that their efforts are centered around automation and finding solutions to document the typical incomes for self-employed and gig economy workers.

In the meantime, the prospects for the Warner-Rounds bill look reasonably strong from the outset, though a version of the bill out of the House of Representatives is still awaited. The legislation is thought to have a strong chance of passage, but no movement is expected on the bill until 2019.