Pam Marron Home Lending

Why Frustration Continues with Foreclosure Code Applied to Past Short Sale, Modification, Deed-in-Lieu

Sept. 19, 2017

Frustration about the problem foreclosure code on past short sale and modification credit issue is daily and here’s why. When a call is received from a consumer or loan originator who needs to get the problem corrected, the caller is usually right in the midst of the problem. Most often, there is a contract pending or a consumer getting ready to close on a mortgage with a lock deadline, and all preventative options that are time consuming are not even a consideration.

Consumers and loan originators who are dealing with past mortgage credit for a short sale or modification don’t expect a problem. The consumer is past the wait timeframe of 4 years for a short sale or 2 years after a modification required for a new conventional mortgage, rather than the 7 year wait required after a foreclosure. No one suspects that the new mortgage will be turned down and loan originators don’t always run the loan through the Fannie Mae and Freddie Max automated systems upfront, leaving this until all accurate data is processed.

But when the automated finding comes back with a denial through Fannie Mae and the lender does not know how to do the Fannie Mae workaround…. or after the denial comes back from Freddie Mac where no workaround exists… or the “date reported” is a secondary issue, a call for help comes in.

When the consumer is in a contract, help needed is the most urgent. Today’s lack of housing inventory threatens those who run into the foreclosure code, with sellers ready to move on to backup contracts with no patience to wait for a fix.

It’s also understandable why affected consumers end up with credit repair companies. When the consumer is told about the foreclosure on past mortgage credit even though they did not have a foreclosure, they are told to contact the mortgage creditor directly for a resolution. The mortgage creditor, sometimes after a lengthy investigation, tells the consumer that the account has been reported correctly and there is nothing they can do. The creditor then directs the consumer to contact the three credit bureaus of Experian, Equifax and TransUnion. But in almost all cases, the 3 bureaus put a “dispute” on the account which [1](in the past) has been required to be removed once the consumer applies for a new mortgage. If the consumer goes to a credit repair company, a dispute is most often the fix of choice as well.

 How a “Dispute” Hurts

The dispute adds two more problems:

  1. Because the account is re-opened with the dispute, the event “date reported” is updated and a secondary problem is that both Fannie Mae and Freddie Mac automated systems think that the consumer has not met the required wait timeframe after the short sale or modification.
  2. A dispute masks the account from automated systems making it invisible. However, the automated systems have required that the dispute be lifted (until July 29th,2017 and with restrictions in Fannie Mae only), which allows the older problem to reappear and the credit score to plummet.

 The problem of removing dispute verbiage was changed on July 29th, 2017 in the Fannie Mae automated system. This may have corrected the dispute issue in Fannie Mae.

Number of Affected Spreads to Modifications, Deed in Lieu, Consumers with Excessive Mortgage Late Payments

In March 2017, it was learned that modification and sometimes deed-in-lieu credit can also be affected by the foreclosure code. Even though there are nearly 2 million past short sellers eligible to return to the housing market (and another 950,000 over the next 3 years), the number of homeowners who have had a modification and are potentially affected is over 5 million.

And though discussion of the problem is directed at the automated systems for Fannie Mae and Freddie Mac, a recent instance exists where excessive mortgage lates resulted in a foreclosure code for a consumer who was denied a car loan by a credit union…. even though they did not have a short sale, modification or deed in lieu.

Problem #1: Foreclosure Code and Where Found

The foreclosure code account is visibly spelled out on the Fannie Mae and Freddie Mac findings. Fannie Mae is precise, naming the creditor account name, account number and if it is seen as a pre-foreclosure or foreclosure right on the findings. Freddie Mac is more generic, noting one, two or three reasons under Credit and Liabilities on automated findings:

  • 13:Recent Foreclosure/ signif derog;
  • 64:Crdt rpt w/recent mtg delinq;
  • YX:The Borrower has had a short sale/DIL of FCL within last 7 yrs.

Fannie Mae has a published workaround that does work the majority of the time. Freddie Mac does not have a workaround.

Problem #2: “Date Reported” Changed

A second problem still exists however for both of the automated systems. The “date reported”, often changed due to a dispute, cannot be changed. Some lenders only require proof of the short sale, modification or deed in lieu date to correct this. Others require that the date be changed on credit report. Changing this date is something that cannot be done through the bureaus.

Fannie Mae Disputed Tradelines

During the weekend of July 29, 2017, Fannie Mae implemented Desktop Underwriter® (DU®) Version 10.1, which included the changes described below and can be found at this link: https://www.fanniemae.com/content/release_notes/du-do-release-notes-07292017.pdf.

Disputed Tradelines

DU Version 10.1 will include an updated risk assessment and messaging for loan casefiles for borrowers with disputed tradelines. DU will first assess the risk of the loan casefile using all tradelines reported as disputed by the borrower. When DU issues an Approve recommendation using the disputed tradelines, no further documentation of the disputed tradeline will be needed and the following message will be issued.

The following tradeline(s) were identified by DU as disputed by the borrower. Because DU issued an Approve recommendation when including the disputed information in the credit risk assessment, no further action is necessary.

FNMA disputed tradeline

When the loan casefile does not receive an Approve recommendation using the disputed tradeline in the risk assessment, the risk will then be assessed with the disputed tradeline excluded and DU will issue the following message:

The following tradeline(s) were identified by DU as disputed by the borrower. Because DU was not able to issue an Approve recommendation when including the disputed information in the credit risk assessment, the lender must determine if the disputed account belongs to the borrower and confirm the accuracy and completeness of the information on the tradeline. If the borrower is not responsible for the account or the information on the tradeline does not accurately and completely report the account, no further action is necessary regarding the disputed tradeline. If the borrower is responsible for the account and the tradeline information accurately and completely reports the account, the lender may manually underwrite the loan if the transaction is eligible for manual underwriting.

FNMA disputed tradeline

NOTE: Tradelines reported as medical debt will continue to be excluded from the disputed tradeline identification. Lenders are not required to investigate the disputed medical tradelines.

 

[1] Fannie Mae Disputed Tradelines: During the weekend of July 29, 2017, Fannie Mae implemented Desktop Underwriter® (DU®) Version 10.1, which included changes on Disputed Tradelines that can be found at this link: https://www.fanniemae.com/content/release_notes/du-do-release-notes-07292017.pdf. The full information about Disputed Tradelines is above.