Pam Marron Home Lending

If no short sale credit code, problem persists in Fannie Mae and Freddie Mac Automated Underwriting System

Erroneous short sale coding will continue to cause havoc in FNMA and FHLMC automated underwriting systems until we 1) make a short sale specific code and 2) place accountability for correction where “Dual Tracking” caused erroneous foreclosure code.

 

A good start. FNMA sees the the M-8 or M-9, per the following Desktop Underwriter Clarification, “DU identification of a previous foreclosure or preforeclosure sale” just out March 13, 2013. And they acknowledge…

  A preforeclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved. At this time, there are no codes provided in the credit report data received by DU that specifically identify a preforeclosure sale.

 

FNMA

 Desktop Underwriter Clarification  

 The DU identification of a previous foreclosure or preforeclosure sale    March 12, 2013

Recent requests for clarification on how Desktop Underwriter® (DU®) identifies a foreclosure and a preforeclosure sale have been received. This document is being provided to clarify the DU identification of these significant derogatory events.

 Foreclosure Identification

When reviewing the credit report data received, DU reviews the manner of payment (MOP) codes and Remarks Codes associated with each tradeline, and the Public Record information to determine if a foreclosure has occurred.

Mortgage accounts, including first liens, second liens, home improvement loans, HELOCs, and mobile home loans, will be identified as subject to a foreclosure if there is a current status code or MOP code of “8” (foreclosure) or “9” (collection or charge-off); or if there is a foreclosure-related Remarks Code present in the credit report data and associated to the tradeline.

Interpretation: M-8’s and M-9’s (also an “8” in the payment history triggers this) and foreclosure related remarks will be identifier for foreclosure.

If a foreclosure was reported within the seven-year period prior to the report date associated with the tradeline, the loan casefile will receive a Refer with Caution recommendation and will be ineligible for delivery to Fannie Mae as a DU loan.

The statement above about “Refer with Caution” finding may be interpreted that an M-8 or M-9 IS a foreclosure and a resulting “Refer with Caution” will be considered correct. There is no explanation that the coding initially placed on the credit by a lender could be incorrect, or the distinction between foreclosure and a pre-foreclosure/short sale criteria.

Most underwriters are simply turning these files down upon receiving a “Refer with Caution” finding or requiring that the credit be corrected. Past short sellers who are eligible for a new mortgage are denied or prolonged from getting a new mortgage due to NO SHORT SALE CODE which is producing errors in credit repositories that reflect a short sale as a foreclosure.

The problem is STILL the incorrect coding, and there are two reasons why this error will continue to plague past short sellers in the mortgage industry and further:

1. Because…

a. Short sales are not common except for the last 4-5 years

b. Short sales are shown as a foreclosure most often on FNMA and FHLMC automated underwriting findings

c. many in the mortgage and banking industry don’t know there is no short sale credit code and the only indication is typically the statement “settled for less than the full balance” on a credit report

 … underwriters reflect that a short sale should be treated the same as a foreclosure and a denial backed up by the Refer With Caution is proof. In almost all cases, underwriters require the credit error to be fixed.

Hopefully, lenders will start recognizing this error and look closer, rather than issuing a denial with little or no effort to find out if the past loan can be proven as a short sale.

 2. Dual Tracking: though legally supposed to be halted, this practice of continuing with a foreclosure is still being practiced by lenders, even with a pending short sale and the homeowner in the process, and results in an erroneous foreclosure code parallel to the short sale. This is a major reason that many successful short sales show up as a foreclosure.

 NOTE: On loan casefiles where DU determined a mortgage or HELOC account was subject to a prior foreclosure, if the account was actually reported in error, or the foreclosure was the result of extenuating circumstances, lenders have the option to manually underwrite those loans (assuming the appropriate waiting period has been met) in accordance with the Fannie Mae Selling Guide.

 

Preforeclosure Sale Identification

A preforeclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved. At this time, there are no codes provided in the credit report data received by DU that specifically identify a preforeclosure sale.

With DU Version 8.2 in December 2010, DU began issuing a message based on the presence of Remarks Codes E0047 (Settlement accepted on this account), T0140 (Settled for less than full balance), or R0107 (Account legally paid in full for less than the full balance) on a mortgage or HELOC account. However, because those codes can be used on any account for any reason, DU is not able to use those codes to identify a preforeclosure sale with 100% accuracy, so it is not able to fully automate the preforeclosure sale waiting period or eligibility requirements.

When DU issues the preforeclosure sale message the lender must confirm that the preforeclosure sale had been completed two or more years from the credit report date, and must confirm that the loan casefile complies with all other requirements specific to preforeclosure sales as specified in the Fannie Mae Selling Guide.

NOTE: On loan casefiles that receive a Refer with Caution recommendation because DU determined a mortgage or HELOC account was subject to a foreclosure (based on a current status or MOP code of “8 or “9”, as stated in the Foreclosure Identification section above), if the account was actually subject to a preforeclosure sale, lenders have the option to manually underwrite those loans (assuming the appropriate waiting period has been met) in accordance with the Fannie Mae Selling Guide.

Lender Responsibility

For all mortgage loans, the lender is responsible for reviewing the credit report, as well as all credit information, to determine that the credit report meets Fannie Mae’s requirements and that the data evaluated by DU was accurate.

If a foreclosure or preforeclosure sale was not clearly identified in the credit report, the lender must obtain copies of appropriate documentation for the event and ensure that the appropriate waiting periods and eligibility guidelines have been met. The documentation must establish the completion date of a previous foreclosure or preforeclosure sale.

Additional information is available in Appendix A of this document, as well as the Fannie Mae Selling Guide.

For More Information

For more information about these topics, lenders may contact their Fannie Mae customer account team; and mortgage brokers should contact their DO sponsoring wholesale lender.©

 

Appendix A: Fannie Mae Selling Guide Sections

The following section of the Selling Guide further describes how DU determines a foreclosure, provides information on the message issued on a preforeclosure sale, and is the official policy statement of Fannie Mae.

 B3-5.3-09, DU Credit Report Analysis

DU applies the following guidelines to prior foreclosures:

• Mortgage accounts, including first liens, second liens, home improvement loans, HELOCs, and mobile home loans, will be identified as a foreclosure if there is a current status or manner of payment/MOP code of “8” (foreclosure) or “9” (collection or charge-off); or if there is a foreclosure-related Remarks Code present in the credit report data and associated to the tradeline.

• If a foreclosure was reported within the seven-year period prior to the credit report date, the loan casefile will receive a Refer with Caution or Refer with Caution/IV and will be ineligible for delivery to Fannie Mae.

• If the filed date and the satisfied date of the foreclosure are both unknown, but it appears that the foreclosure occurred within the seven-year period prior to the credit report date, the lender must confirm that the foreclosure did not occur within the most recent seven-year period.

• Foreclosure laws vary by state and the time it takes to complete the process may vary by state. DU assumes that the date the foreclosure was reported in the tradeline is the date of the foreclosure sale or liquidation. The lender must confirm that all foreclosures are satisfied.

 Preforeclosure Sales or Short Sales

DU is not able to identify preforeclosure or short sales in the credit report data. Lenders must manually apply the preforeclosure sale requirements to DU loan casefiles, regardless of the underwriting recommendation received from DU.

DU will issue a message on loan casefiles where the borrower’s credit report indicates an account may have been released to a preforeclosure sale. The recommendation on the loan casefile will not be changed when this information appears on the credit report, though as stated above, the lender must ensure the loan complies with all other requirements specific to preforeclosure sales as specified in B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit (05/15/2012).

 Note: B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit (05/15/2012), also contains additional requirements pertaining to underwriting borrowers with a preforeclosure sale, short sale, or extenuating circumstances. DU is not able to identify preforeclosure or short sales in the credit report data, or whether the borrower’s derogatory credit history was the result of extenuating circumstances. Loan casefiles that receive a Refer with Caution or Refer with Caution/IV recommendation due to a bankruptcy or foreclosure action that was caused by extenuating circumstances may be manually underwritten if the lender has the appropriate documentation that these events occurred, the applicable minimum time period has elapsed, and the loan meets all requirements of this Selling Guide that pertain to manually underwritten loans.

 

 

March 17, 2013 by · 2 Comments

About Pam

Since 1985 as a loan originator, highly experienced with automated loan approvals on DU, LP, and with USDA GUS systems, thorough knowledge and use of FHA loans including 203K rehab, conventional loans including USDA, Homepath and rehab, and VA loans. After 27 years, I STILL love this business!

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2 Responses to “If no short sale credit code, problem persists in Fannie Mae and Freddie Mac Automated Underwriting System”
  1. John Balmer says:

    Hi Pam, Have an identical situation, am a mortgage broker, struck out with all of my investors who agree that a prior foreclosure (didn’t go all the way through, borrower redeemed home) meets the extenuating circumstances and relaxation on 7 years, however; no way to get DU approve/eligible, so no go. You know any wholesale lenders doing manual conventional underwrites with refer findings??

    • Pam Marron says:

      John, please call me at 727-375-8986. If this was not a foreclosure, you should be able to get through FNMA AUS. Call me, I will help you through…. Pam

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