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Jun 22

FHA Reverses Recent Changes

June 15th 2012, FHA issued Mortgagee Letter 2012-10 that rescinds two changes outlined back in February in Mortgagee Letter 2012-3.  Both of the sections covered in this month’s letter refer to issues on the borrower’s credit report.  The first item covers how to address disputed accounts and the other one covers collections and judgments.

A disputed account is when an individual submits a formal complaint with one or more of the credit repositories claiming information on their credit report is inaccurate.  In other words they dispute the information.  This tactic is most commonly used in an attempt to remove negative information, such as late payments or collections.  Any third grader would know it is wrong to tell a lie and their parents should know that doing so in order to get a mortgage loan approved is a felony offence.   

An open disputed account is a red flag for any DE underwriter.  In February FHA removed the flexibility underwriters had when they came across a dispute on a credit report.  Basically, any dispute on an account over $1,000 or combination of accounts that totaled over that amount would cause the loan application to be denied. 

I know, if you read the letter it doesn’t say that exactly, but don’t forget I am bilingual, my language of choice is slow southern drawl but am also fluent in mortgage mumbo-jumbo.  Here is how it translates, before February the subject was left up to the underwriter, after that it is only left up to the underwriter if the amount is less than $1,000.     

Actually, I agree with the change that tightened up this loop hole.  Mortgage fraud is serious and it hurts all of us.  Disputing accurate information should not be allowed period unless the borrower has solid evidence like a cancelled check showing the payment was made on time, etc.

Evidently this little change caused quite a ruckus because it has been reverted by the most recent Mortgagee Letter.  I personally believe this is a step in the wrong direction.  I didn’t like removing any discretionary abilities from my underwriters but thought it was the right thing to do for the overall good of the nation.

Here is the gut level truth; people that actually qualify for a mortgage are not in the habit of disputing garbage on their credit report.  Most, not all, but most of the people that have multiple disputes are trying to commit fraud.  The government should not allow it to be easy to do.   So I believe this recent change is a step in the wrong direction.

The second change covered collections and judgments.  In the past the underwriter was able to make a decision on collections, the change in February limited that to collections under $1,000.  Judgments of any size needed to be paid off.  A judgment is simply a collection that has been taken to the next level so I have never understood the logic of ignoring one and not the other.  A large collection could morph into a large judgment and that would always happen when the individual could afford it the least.  I believe that is some kind of financial universal law similar to Murphy ’s Law.

Both of the changes from February have been rescinded which makes it easier to get approved for an FHA mortgage.   

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