Pam Marron Home Lending

8/16/14 Fannie Mae “Fix” Appears to be Working!

NEW 8/16/2014 Fannie Mae “Fix” in automated underwriting system appears to be working!

Desktop Originator/Underwriter is now providing  Approve/Eligible results for past short sellers where short sale credit was coded as FORECLOSURE. But, past short sellers will have to prove “extenuating circumstances” to receive new mortgage approval two years after short sale.

Below are details for loan originators to be aware of when inputting these loans:
Run file through Desktop Underwriter/Originator first.  You may get an Approve/Eligible right away without having to go in for corrections.

Important: You must be in Desktop Underwriter/Desktop Originator to make changes, not in your loan operating system!

If you are re-running a past submission, make sure to clear out the old casefile ID# for cases run prior to 8/16/14. This is done in your loan operating system.

(Calyx AUS shown below).

closewithpam.edit casefile

 

If you have just run the file through DU/DO Fannie Mae and are getting Refer with Caution:

  • Within DU/Fannie Mae, go into “Edit Loan”, then “Full 1003″ and then “Declarations”.
  • Change answer to question c. to “Yes”.
  •  Click on “Explanation” button at bottom right on “Declarations” page.

FNMA.Full 1003.Declarations

On “Declarations Explanation” page in DU/Fannie Mae:

  •  If you are strictly trying to correct a FORECLOSURE code noted on findings for a short sale, enter on line c.: Confirmed CR FC Incorrect
  • If you have “Extenuating Circumstances” and are trying to get DU/Fannie Mae approval at 2 years after short sale (and yes, DU can provide this, does not require manual underwrite!) , enter on line c.: Confirmed CR FC EC

FNMA.Declar Explan

NEW!!!

Short sellers who can prove extenuating circumstances will be able to get a conventional mortgage two years after a short sale.

If extenuating circumstances cannot be proven, the wait timeframe will be four years.

Extenuating Circumstances can be found in the Fannie Mae Selling Guide  

B3-5.3-08: Extenuating Circumstances for Derogatory Credit: Updated 7/29/2014

 Extenuating Circumstances

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

Distinguishing Difference Between Extenuating Circumstance and Hardship

  • the “hardship” was commonly present to receive short sale approval from lender.
  • “Extenuating circumstances” are non-recurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligation.
  • Extenuating circumstances are the reasons that led to the hardship.

Past short sellers will need to prove hardship existed due to extenuating circumstances to new lenders upon applying for a new mortgage, in addition to proving the home was a short sale and not a foreclosure.

Underwriters, especially those who have not seen a good number of these casefiles, often question hardship, especially when there was a bankruptcy prior or payments were made until shortly before the short sale closing. The perception is “if they were making payments, they must have had the resources. Therefore, when the mortgage payment ceased, it must have been strategic default.” Underwriters are often unaware that most short sale lenders required delinquency in order to approve the short sale.

Additionally, due to the lengthy short sale process combined with the required delinquency, most short seller credit is coded as a foreclosure. Why? Because mortgage delinquencies over 120 days late often receive a foreclosure code.

There are two Metro 2 credit codes currently used for a short sale and both are borrowed from Metro 2 foreclosure credit code. Though these codes are typically found in credit raw data, additional payment history of delinquency common for foreclosure supercedes this code, resulting in the foreclosure code outweighing the short sale code. Because of this, the short sale is often reflected as a foreclosure. Where this is visible is on the Fannie Mae Desktop Originator or Underwriter in conventional mortgage findings.

Loan originators will need to make sure that the REAL STORY is laid out.

Ask your client what really happened, and let them know they will need to provide documentation to prove that savings and other assets were wiped out or unavailable. Many underwater homeowners who have short sold have borrowed from retirement assets, other available credit, and others just to stay afloat.

Short sale documentation needed

  • Hud-1
  • Short sale approval letter from 1st mortgage (and any additional mortgages) held.

Note: Past short sellers may not have this available. Have them contact the title company on the HUD-1 or their past realtor for these items.

  • Have your client write a detailed letter explaining the circumstances that surrounded the short sale event. Make sure that the final reason that prompted them to finally short sale the home is clearly explained. If it does not make sense to you, it will not to an underwriter, either!
  • Make sure to note that if mortgage delinquency was required, this was reason for delinquency. Some were not able to continue making payments, but many would have if given the option. Make it clear that if your client could have made payments, that they would have.

Second mortgage and/or deficiency payments paid after the short sale closing

  • Many past short sellers also paid on a deficiency that is often forgiven after a few years. If this existed, retrieve the letter for the deficiency payment closing showing that your client was forgiven of the additional debt. You will need to pull together documentation to show that deficiency was directly attached to the short sale property. These deficiency debts are an additional credit problem because:
    • The “date reported” of forgiveness often reflects years after the short sale, causing both Fannie Mae and Freddie Mac to think the short sale closing took place on that date. If that date is within the last two years, this problem often results in a new mortgage [1]denial through Fannie Mae and Freddie Mac automated systems.
    • the loan is often visibly coded as a delinquent revolving debt or a charge-off of a mortgage and is often shown as a foreclosure account on credit.

[1] Fannie Mae will provide the specific account that shows as a foreclosure, resulting in a “Refer with Caution” conventional mortgage denial. Freddie Mac will not provide the specific account that results in a “Caution/Ineligible” denial.