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The Long & Short: The Business of Short Sales

Pam Marron
Mar 13, 2014

The practice causes severe havoc on credit, results in erroneous coding of a foreclosure for a short sale and delays consumer rebound for new credit and re-entry into the housing market. And, it can be fixed. Policy at the root and how it happens En-masse, lenders continue to require that underwater homeowners must be delinquent on their mortgage in order to get a short sale approval. Trying to proceed with a short sale while staying current on a mortgage has proven to be immensely difficult for those who try. Lenders question the "depth of hardship" when the underwater homeowner pleads to stay current, even when an acceptable hardship is evident. Often, underwater homeowners attempting to stay current are self-employed and concerned about how delinquent mortgage credit will affect their business credit, or government employees who may jeopardize their job if they go delinquent. Lenders commonly leave the reason for the short sale denial blank for these homeowners or simply don't respond until the underwater homeowner gives up and goes delinquent. Yet, the press continues to report on the "strategic default" practice and that a large number of underwater homeowners are choosing to go delinquent even when the homeowner is capable of making the mortgage payment. Yes, there are those who take advantage of the system and clearly abuse the process. But the August 2013 Working Paper put out by the Federal Reserve Bank of Atlanta and entitled "Unemployment, Negative Equity, and Strategic Default" suggests that "ruthless" or "strategic" default during the 2007-2009 recession was relatively rare. The report cites that individual unemployment is the strongest predictor of default. Lenders continue to require short sales to be delinquent for two reasons found so far: 1) To prevent loss of time into loss mitigation if the homeowner does not qualify for the modification or short sale; and 2) For the servicing incentive fees paid to the lender for loss mitigation department processes. Delinquent loans are commonly processed through lender loss mitigation departments. A practice called "dual-tracking" often takes place where the short sale is placed on a loss mitigation track even if the homeowner has applied for a modification or a short sale. When the mortgage delinquency exceeds 120 days, mortgage credit is commonly coded as a foreclosure. Because of the lender short sale processing timeframe, where application, contracts and home value documents must be submitted and approved, exceeding 120 days before a mortgage closing is typically inevitable. Short-sellers who are approved and close as a short sale most often unknowingly end up with a foreclosure code on their short sale. This problem was not visual until eligible past short-sellers able to reenter the housing market applied for a new mortgage and the foreclosure code appeared specifically on conventional loans in both Fannie Mae and Freddie Mac automated underwriting systems (AUS). The foreclosure code results in a loan denial and a required seven-year wait, even though underwriting criteria allows past short-sellers to be eligible for a new mortgage two years after the short sale. This was also when it became apparent that there was no universal, specific short sale credit code. Variations borrowed from multiple foreclosure codes in Metro 2 are used. But lenders, unaware of the confusion, simply code short sales as foreclosures due to delinquency timeframes, which can be proven. There are fixes. More than nine million past and currently underwater homeowners are affected. Stay tuned. Pam Marron is senior loan officer with Bankers Mortgage of Pasco County. She may be reached by phone at (727) 375-8986 or e-mail [email protected]
Mar 13, 2014