Big mortgage changes are happening…or maybe not!

Watching the Federal Housing Administration try to change their guidelines over the last few months reminds me of a bad movie where a random person is mistaken for a trained Police Officer. Then thrown out in the middle of a busy intersection and expected to direct traffic. The person tries their best but after several “go, stop, wait, slowdowns and uh oh’s” we are left with a 50 car pileup and a huge mess to clean up. Let’s take a look at how they have done so far and what the proposed changes have been.

In late February, they announced they were set to go ahead with new changes effective April 1st, 2012. The main issues that were to be affected by these new rules were “disputed accounts” and unpaid collections, Profit & loss accounts and charged off accounts.The highlights of this first proposed change that was if the total outstanding balances of ALL disputed accounts and ALL collection, P&L and charged off accounts regardless of age, is $1,000 or greater, the account must be:

  • Verified as not a debt to the borrower; OR
  • In a repayment arrangement with a minimum 3 months of verified payments documented as paid as agreed and those payments included in the borrower’s debt-to-income ratios; OR
  • Paid in full, prior to, or at the time of closing.

After this bold stance they came back around the start of April with a slight “slowdown” and made a few concessions. Here is the summary of those changes:

  • P&L, charged off and repossession accounts will NOT be considered collection accounts or subject to the guidance of the new changes
  • Borrowers will be exempt from the new rules if the disputed collection with an aggregate amount of $1,000 or greater was a result of “life events” such as medical, death, divorce, loss of employment, etc. may be acceptable as long as the borrower provides a written explanation AND documentation.

Also in this set of updates if the credit report reveals that the borrower is disputing any credit accounts, there will be additional restrictions placed on that persons ability to qualify for an FHA loan unless;

  • The total outstanding balance of all disputed accounts are less than $1,000 AND
  • Disputed accounts are aged no less than two years from the date of last activity as indicated on the most recent credit report.

Now it is time for the “uh oh” just before the 50 car pileup took place…they announced the latest set of changes have now been postponed until July 1st!

Watching this unfold, one is left scratching their head.It is just another classic case of people making decisions about something they really don’t know anything about in the first place and having no clue at how massive the ripple effect of a terrible change like this might be.

By restricting people’s ability to “dispute” inaccurate, unverifiable or outdated accounts on their credit report , FHA is basically taking the stance that the credit bureaus rarely make a mistake and they are deeply concerned about the accuracy of what they report on a persons credit report.The problem with that stance is it’s been estimated that roughly 79% of credit reports have serious errors on them! Not exactly a number that says the system is so good that we can actually strip consumers of their rights to have an accurate report.

This bit about if a collection is more recent than two years old based on the date of last activity then it falls into these new guidelines, just might be the biggest joke of all in my mind.Let me preface, I am not making an opinion about whether the collection needs to be paid or not, I am committing on the method that will be used to determine if it needs to be paid.The date of last activity is supposed to reflect the last time a payment was made on the account or new terms were agreed to.The problem with this is most collection companies know as much about this as FHA apparently knows about credit reporting. Collection companies already falsely update this date all the time.What do you think will happen once they realize that as long as they keep updating this date, the chance of them collecting on this debt is astronomically higher? I’m going to make a prediction that a lot of collection companies will just make this normal business practice and always update that date on a monthly basis.

If these rules come into play, the big winners will be collection companies and credit bureaus.If that was FHA’s goal when they threw out these changes, then mission accomplished.Let’s hope this waiting period is one that will help FHA realize their changes will completely miss the mark of what they are trying to accomplish!

Author: Dan Beck

Dan Beck is a credit repair expert who teaches consumers how to create an "A Rated" credit profile. Would you like to receive a FREE Consultation with Dan? If so, click here.

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