Many are aware of the foreclosure code placed on past short seller credit. As past short sellers surge back into the housing market, new problems come to light. Short sellers who paid on a deficiency after the short sale closed are getting denied by both Fannie Mae and Freddie Mac for a conventional mortgage for three reasons:
1. The short sale credit is coded as a foreclosure, the same problem that almost all short sales are experiencing.
2. The date the deficiency is paid off pulls forward as the date the short sale "Foreclosure" occurred. Two years must lapse before a past short seller is eligible for a conventional mortgage, and this is causing a denial when the paid off date is within two years.
3. Paid off deficiencies often appear as a "charge-off" or M-9, and lenders are not downgrading credit code, stating they are coding correctly.
As the economy shows improvement, many past short sellers with two years or more behind them since their short sale are surging back into the housing marketplace. Many are aware of the erroneous foreclosure code that is commonly visible for the first time in Fannie Mae and Freddie Mac automated underwriting systems (AUS) and are preparing prior to a home purchase, checking to see if the code problem exists on their credit.
A good number of past short sellers had deficiencies, or additional funds, required to absolve the short sale debt. Some had deficiencies because they were government employees who cannot go delinquent in order to keep their job. Others insisted on continuing to pay to keep credit intact through a short sale, and many more appear to be in jobs where higher pay is likely, even though these folks suffered an acceptable hardship to get the short sale approved.
Even though the deficiency is paid, or the payment is included in the new debt-to-income (DTI) calculations, more credit problems have appeared that result in a new conventional mortgage denial for these past short sellers.
We are already having problems with the Fannie Mae solution that was supposed to allow a "fix" when the erroneous foreclosure code is applied to short sales. This only works when Fannie Mae sees a conflict in the credit report narrative, and gives the "go ahead" to the lender to try the fix. This fix only happens occasionally.
And Freddie Mac, where an approval cannot be seen for a conventional mortgage prior to four years after a short sale, is now showing the same problem.
Getting this problem fixed now is imperative, and here is the reason why.
There are 2.2 million past short sellers, and 6.5 million, or 13.3 percent of all U.S. residential mortgage holders that still have negative equity at the end of 2013, per CoreLogic.1 That is 8.7 million U.S. consumers that are, or may have a problem coming back into the housing market.
If you examine the credit of most past short sellers, you will see pretty good credit prior to and after the short sale. This doesn't mean these folks "scammed the system" as articles about strategic defaulters profess. Lenders only need to look at the excessive back end DTI of past short sellers and underwater homeowners who are trying to exit their home where ratios are so high, a new mortgage is not possible. And, they will see a credit pattern of homeowners who have done all they can to continue making payments, even at the peril of other debt. THE PROOF IS NOT HARD TO GET. A great majority of past short sellers have and continue to hang on until they can no longer.
The "root" of the problem is that lenders continue to this day to require negative equity homeowners to go delinquent on their mortgage first, before any help for a short sale is given. Once this delinquency exceeds 120 days, the homeowner's credit is coded as a foreclosure. Usually the homeowner is unaware of this until they apply for a conventional mortgage two years later and a new mortgage denial through the Fannie Mae and Freddie Mac automated systems shows the foreclosure.
If the housing market wants to see some honest gains in the market, we need to tackle this erroneous short sale code problem now and get a specific short sale credit code, just like the codes for a bankruptcy, foreclosure and collections.
Lenders, credit reporting agencies, both Fannie Mae and Freddie Mac, and most importantly, 8.7 million consumers are pleading for this.
Pam Marron is senior loan officer with Innovative Mortgage Services Inc. She may be reached by phone at (727) 375-8986 or e-mail
[email protected].
Footnote
1—Web site: http://www.corelogic.com/about-us/news/corelogic-reports-4-million-residential-properties-returned-to-positive-equity-in-2013.aspx.
This article originally appeared in the April 2014 edition of National Mortgage Professional Magazine.
