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With the House getting nearer to a vote on the FHA Housing and Homeowner Retention Act, there are few industry professionals who don’t see some glaring holes that need patching prior to the passing of this legislation.

Mortgage Professionals in general expected shoddy craftsmanship from this bill thanks to its loyal backer - Rep. Barney Frank, D-Mass. Congressman Frank has appeared over the past year to be wholly out of touch with the realities of the Mortgage Industry from how loans are generated to how professionals in the industry perform.

Needless to say, wholesale bailing out of troubled Homeowners still leaves a lot of dings in the armor of the economy over the long term…something that quick fixes like Rep. Barney Frank seems to miss completely.

As a Mortgage Professional, I can’t help but take notice that there are no measures out there to stem future bleeding in the credit reporting arena. These homeowners that are going through Short Sales or restructuring with Government intervention are still being penalized for late payments that may actually not be their fault.

Sure, there’s always a CAVEAT EMPTOR - Buyer Beware - the average borrower needs to remember that they still have to pay their bills one way or another…but if the system is at fault due to unruly lender underwriting practices, then I pose this question:

Why should the ultimate and long term effect trickle down to the consumer via the credit market??

I believe a logical addition to this bill would require the 3 major Credit Bureaus to work with Lenders and Borrowers both to determine how severe derogatories (lates) on Mortgage related credit lines should remain.

Sure - if there is just a missed payment due to financial sloppiness, that’s one thing…but if a consumer is legitimately caught up in a mess due to an ARM reset that is out of their control due to fluctuating home prices and thereby the lack of ability to refinance, that should carry either a lighter penalty on their credit scoring or a shorter term penalty.

Lighter Penalty:

There really is no way that it wouldn’t count in some way against the borrower’s credit score… but if a borrower misses a payment due to their Lender and Property Values declining, should it weigh them down as much. Also, should it keep them from getting future home financing??

This question has multiple angles to understand and one of them is simply that FHA mortgages do not fit everyone. Independent Contractors who get 1099s and have had a bad year due to the economy but have performed well over time are a hard fit for FHA or any Full Documentation loan. Right now there are few Stated Income Programs available and any mortgage late will keep that target borrower on the sidelines for a while - or suffering for a long time.

Shorter Term Penalty:

Many lenders require that there are no Mortgage Lates on the credit report for the last 24 months. An easy amendment would be that borrowers that qualify for FHA Refinances in this government restructuring, or those who can prove that the combination of a poorly timed ARM reset plus declining home values were completely out of their control maybe should deserve some sort of reprieve on these derogatories.

This would take a concerted effort between legislators and the ultra-protective and overly-insular credit reporting bureaus. Equifax, Experian and Transunion may need to release some disclosure to key lawmakers regarding their algorithms for scoring… or perhaps speed up the adoption of Vantage Scoring with a side note regarding current economic issues.

Technically, these derogatories are the ultimate pre-payment penalty for the newly restructured FHA and FHA-Secure loans… but why not work on the road to overall economic and housing-market recovery by addressing a core issue.

In pre-qualifications, there are 3 key things creditors and lenders look at - Credit, Income and Assets. Once FHA change-ups fix Asset issues and Incomes stabilize due to consumer confidence being restored and inflation coming back down… Credit remains the odd-man-out.

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David A. Podgursky, MBA
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