Pam Marron Home Lending

WHY Specific Short Sale Code for 11.3 Million Who Were or Are Underwater is Worth It

For a long time, a battle has been waged to get a short sale credit code for past short sellers. Almost all  who have short sold will tell you that they were told upfront that the only way to get short sale approval was if they were delinquent on their mortgage first… told to them by their short sale lender, a realtor or an attorney.

Why the need for a specific short sale credit code?

Getting a specific short sale code will stop the mortgage denial that most short sellers face when they apply for a conventional mortgage two years after the short sale when a foreclosure code shows up on past short sale credit. This is because mortgage credit that goes past 120 days late is coded as a pre-foreclosure or foreclosure.

A specific short sale credit code could be the alternate code used by lenders to change a short sale coded as a foreclosure to a true short sale. And, this specific short sale code could be applied to all short sales going forward.

Why there is great worth for a specific short sale credit code

In almost every single case I see, credit was pretty good before the short sale, until the homeowner had to go delinquent, most often a lender requirement for a short sale approval. Credit is also pretty good after the short sale, and eagerness to improve credit after the short sale is apparent as consumers point out how they are “making it better”.

The ironic flip side to this is that the rebuilt good credit and the ability to come up with 20% down two years later for a conventional mortgage prompts those who have not gone through a short sale to to speculate that “maybe there wasn’t a real hardship”, and fuels the fire of “strategic default”.

From personal experience, I will attest that those who don’t believe these folks are “having hardship enough” need to take a closer look. The hardship is there and painful for most to relay again, as they convince the new lender of why a short sale will never happen again. You may be surprised at the reality of what happened, and be prepared that most will not expose this unless prodded to do so.

A unique difference that is apparent in almost every short sale case is the presence of a dangerously high back end debt to income ratio (DTI), often over a period of time, when underwater homeowners grapple with how to exit their home. Homeowners hang on for as long as possible, borrowing against other credit to stay solvent. A great number of these consumers have wiped out retirement assets and borrowed from others, until there is nothing left to do but short sell.

Why underwater homeowners and past short sellers should fight for a specific short sale credit code

A great majority of underwater homeowners aren’t the “strategic defaulters” that the press and so many others have made short sellers out to be. It is apparent that many stayed in negative equity homes longer than they should have, not quite sure what to do. Every one of them has a story of trying to “do the right thing”, and almost all didn’t tell the real story in their hardship letter to the bank. There seemed to be confusion, as if they were trying to convince the lender that they were worthy of being approved for the short sale, with very little said about the hardship.

Many in this unique financial meltdown were affected simply because they were in an area of the United States where home values plummeted.  Though there are those who tried to scam the banks, the majority did not and have been humiliated by this process, keeping silent even afterwards.

Why this is important for those affected

This is now a fight for those affected, for a credit standing that many of you have built over a lifetime. Erroneous credit can affect interest rates and program eligibility for you in the future. You did the right thing by working with the bank on a short sale and not going into foreclosure. Your credit should not reflect a foreclosure.

underwater_homes_top_states_march_2014

 

9.1 Million U.S. Residential Properties Seriously Underwater in First Quarter, Lowest Level in Two Years/RealtyTrac/April 15, 2014/ http://www.realtytrac.com/Content/foreclosure-market-report/q1-2014-home-equity-and-underwater-report-8037

 

And here’s a news flash. Those who were approved for a short sale and are paying back on the deficiency…. they can’t get back into the housing market either.

Why the mortgage and real estate industries need to fight for a specific short sale credit code

There’s a pattern here, a good one, where importance of credit is apparent, except for the stint of late payments required to exit an underwater home. For a conventional loan, you can re-buy a home 2 years after the short sale with 20% down. Most of the time, past short seller loan files are impeccable, a loan that any lender would jump at.  Short sellers have often been maligned as “strategic defaulters” who willingly stopped making payments. This is often far from the truth, and it can be proven that many lenders, or “investors”, still require underwater homeowners to be delinquent on their mortgage before a short sale approval will be granted, to this day.

There are [1]2.2 million past short sellers across the U.S., many ready to come back into the housing market.

And quietly, another 9.1 million still underwater homeowners are inquiring about what will happen to them when they have to exit their home.

Yes, values are finally rising again. But in many areas, the increase is not enough to pull negative equity homeowners above water, and we are starting to see a new trend of short sellers coming into the real estate market. Many must sell because they have to, not because they want to. Many are calling to inquire about what their credit will look like, preparing for problems they hear and read about after a short sale. These are not deadbeats, but homeowners who are preparing to go through the arduous short sale process with the lender.

Others are already helping

There is already good dialogue between credit reporting agencies who are aware of the foreclosure code being placed on past short seller credit and who are trying to help affected consumers. The National Consumer Reporting Association (NCRAinc.org), a nationwide trade organization of credit reporting agencies, has helped to bring this problem to the forefront.

In May 2013, Senator Bill Nelson of Florida, was made aware of the problem, saw the credit impact and demanded a solution for the problem from the Consumer Financial Protection Bureau (CFPB). The CFPB, already aware of this problem, worked diligently with the Fannie Mae Desktop Underwriter (DU) system on a fix, but the “fix” has posed confusion. Lenders are supposed to be able to instruct DU of an erroneous foreclosure. Instead, the Fannie Mae system must see a conflict in credit code on their end first, and provide a message to the lender for entry to Fannie Mae’s DU system to correct the problem. In other words, Fannie Mae must give permission to do the correction, but only when they see a problem.  Fannie Mae permission to correct the erroneous foreclosure code is given only occasionally, and lenders across the country have given up on this fix.

A few solutions have come out of this problem, often stumbled upon when comparing data.

Full directions for two of the solutions can be found at Directions to SUBMIT A COMPLAINT to the Consumer Financial Protection Bureau and Lender Letter

An intro video to the short sale credit code problem and the two working solutions can be found on the YouTube video “2 Working Solutions for past Short Sellers with FORECLOSURE on short sale credit” at   https://www.youtube.com/watch?v=D2YMtM3ILa4

2 working solutions

 


[1]Boomerang buyers return to market after foreclosure/By Les Christie  @CNNMoney March 11, 2013 http://money.cnn.com/2013/03/11/real_estate/foreclosure-homes/

May 28, 2014 by · Leave a Comment

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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