FHA delays collections rule
Lenders had feared that up to 20% of borrowers could be cut out of the market if the new rule barring loans to clients with more than $1,000 in collections accounts went into effect.
In the new world of tighter credit, mortgage lenders are looking for ways to add more guarantees that borrowers will not default on their loan.
One new rule, which had been scheduled to go into effect April 1, would deny Federal Housing Administration loans to anyone who had more than $1,000 in disputed or unpaid collection accounts.
After estimates that the change in policy could put up to 20% of FHA mortgage applicants out of the market, the FHA has delayed implementation of the rule for three months and will collect additional comment.
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Previously, collection accounts on a credit report did not scuttle the loan. Instead, it knocked it into manual underwriting, and borrowers allowed to explain the collection. For example: Perhaps it was in error, but the borrower had not yet persuaded the collection company.
FHA loans are favored by first-time and less affluent homebuyers because they can buy a house or condo for as little as 3.5% down.
Although denying loans to people who have not paid their bills in the past seems logical, the practices of the credit-collection industry make it quite possible that people could have old or erroneous collections data in their records.
Syndicated columnist Kenneth R. Harney talked to Jeremy House, a loan officer in Arizona, who noted that many Americans have old medical collections accounts, valid or not, in their files. Harney wrote:
House cited the example of an applicant with a FICO score of 770 who recently discovered that two new medical collections had popped up on his credit reports. The applicant said he had no knowledge of the unpaid bills or the doctor, and believes them to be in error. But the appearance of the collection items knocked his FICO score down to 655. Under the new FHA policy, it could take months to dispute and resolve the issue.
Although the new policy has been delayed, at least until July 1, Harney's advice to consumers still stands: If you're thinking of buying a house, get a copy of your credit report well in advance so you have time to dispute any errors.
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Most people by now probably know that they should get a copy of their credit report before they start looking for a home. I would say that people with genuine past due collection accounts should probably be denied funding. It is you and me the taxpayer that is on the line (and our children's children) when people default on these loans. That being said, the blanket rule they describe here sounds like it was poorly designed. A person with enough past due collection accounts will hopefully have a low enough FICO that they won't qualify, with or without this rule. (remember, we the taxpayer do not want them to qualify when they have a low FICO score, it means we can't trust them to pay back the loan)
Tacking rules on top of rules rarely solves the problem. It would probably be easily dealt with by increasing FICO requirements. Look at what they tried to do with the millionare tax. Instead of re-writing the tax code, they tried to pass a millionare tax on top of AMT on top of the standard marginal rates and capital gains rates. (If they want the wealthy to pay more taxes, raise the capital gains rates for the highest earners, from all souces, to something higher than 15%. Just don't choose 40% or that money will go overseas)
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.
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