New Policies by GSE's and Credit Agencies
Written By: Joel Palmer, Op-Ed Writer
Some consumers who may have the most difficulty in obtaining a mortgage loan are receiving a little relief.
That assistance is coming in the form of policy changes from the three major credit rating agencies — Equinox, TransUnion and Experian — and the two government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
Those changes include:
• As of July 1, the credit rating agencies dropped certain tax liens and civil judgments from consumers’ profiles.
• Beginning July 29, Fannie Mae and Freddie Mac are raising their debt-to-income ratio limit to 50 percent of pretax income from the current 45 percent.
• As of September 15, the credit reporting agencies will set a 180-day waiting period before including medical debt on a credit report to ensure that consumers have enough time to resolve disputes with insurers that can delay payments.
The move on tax liens and civil judgments isn’t just about making credit more available. It’s designed mostly to address credit report errors.
The rating agencies will now require credit report citations to include the subject’s name, address and either their Social Security number or date of birth. Existing civil judgments and tax liens typically do not meet these standards.
According to a one report, about 7 percent of credit profiles contain liens or civil judgments. The removal of those items could improve a person’s credit score by 20 points, according to FICO.
The upcoming changes regarding outstanding medical debt are designed to standardize how that debt is handled on credit reports.
When medical bills become past due, hospitals and doctors often use collection agencies. But in many cases, they do so even if payment is only 30 or 60 days past due, which often isn’t enough time to settle disputes with health insurers or to work out a payment plan. Once the debt is in the hands of a collection agency, it appears as a blemish on the debtor’s credit report.
According to the Consumer Financial Protection Bureau, about half of all debt on credit reports is related to medical expenses. For 15 million consumers, medical debt was the only negative information on their credit report.
The increase in the GSE’s DTI standards will also help a significant number of potential homebuyers better qualify for a loan.
This is especially true for millennials who are just starting out after college. Not only are they saddled with a large amount of student loan debt, they are typically earning entry-level income.
Fannie Mae also announced a change to how it treats student loan debt. The agency has traditionally used an arbitrary percentage of student loans, which often inflated a borrower’s DTI. Fannie will now instead use a borrower’s actual monthly payment when calculating DTI.
While some applaud the efforts to help people qualify for mortgages, others think looser lending standards may add to more risk for lenders.
Fannie Mae pointed out that having a DTI of 50 or under doesn’t automatically qualify somebody for a home loan; income, credit scores, and LTV ratios will still be strongly considered.
Detractors warn of a repeat of the 2008 housing crisis, caused in part by too many people getting mortgages they couldn’t afford.
Others are cautioning that lenders will shift their own credit requirements to compensate for these policy changes, especially if significant numbers of consumers with questionable credit qualify for better financing.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
