Two credit problems threaten to severely damage those unfortunate enough to go through a short sale:
1) Going into a short sale, many lenders CONTINUE TO REQUIRE A MORTGAGE DELINQUENCY in order to receive short sale approval, even though new FHFA short sale guidelines allow for underwater homeowners with an acceptable hardship to stay current on their mortgage. The negative results vary from 1) an automatic delay in the ability to obtain a new mortgage, 2) damaged credit that can threaten growth for small business owners, 3) fear of loss of employment or security clearance for government employees, 4) fear of how credit will affect ability to proceed and 5) being mis-labeled as a “strategic defaulter” even when the desire and will to pay is there.
2) After a short sale and when eligible to repurchase a home, past short sellers are stunned that the short sale shows up erroneously on their credit as a foreclosure, and results in 1) a new mortgage denial even when eligible, 2) mistaken delay in the ability to obtain mortgage financing, 3) additional expense to correct the problem and 3) inaccessibility to additional consumer credit because of the error.
Though there are other serious problems that will be examined in this paper, these two problems severely affect credit in unprecedented ways that causes havoc within the mortgage lending and credit industries and greatly contributes to a sluggish rebound of the housing market in areas working to regain a foothold in the economy.
What is At Risk?
Attention to the erroneous foreclosure credit is now coming to light as 2.2 million past short sellers attempt to reenter the housing market. The past short sellers who have been waiting to get back into the market are stalled while lenders and credit agencies scramble to find a solution. This problem has been known for almost two years with little attention given. However, with the extension of the Mortgage Debt Forgiveness Act for another year and interest rates on the rise, there is activity among approximately 16 million underwater homeowners contemplating if they can manage to stay put, or can finally move.
And a new wrinkle: the erroneous foreclosure code may also affect those who are now attempting to stay current on their mortgage. It is unclear whether the problem is in both Fannie Mae and Freddie Mac automated underwriting systems or in the code itself, possibly both. Either way, the difficulty and damage that this coding error results in needs to be fixed before the next wave of past short sellers arrive.
No Short Sale Specific Credit Code
Because there is no specific credit code for a short sale, short sale credit is most often reported as a foreclosure. This error is not often detected until years later when the past short seller applies for a new mortgage and is denied through the Fannie Mae and Freddie Mac automated underwriting systems (AUS).
What hasn’t even been investigated yet is the negative affect the erroneous foreclosure credit code may have on other credit accessibility for past short sellers.
Lender Practices Continue to Destroy Consumer Credit
Banks and lenders are knowingly contributing to the destruction of credit of underwater homeowners. Lenders are still requiring mortgage delinquency in order to proceed with a short sale, even after the Nov. 1, 2012 FHFA New Short Sale Guidelines allowed for homeowners to proceed with a short sale while being current. And, though 46 of the 59 participating lenders in the Making Home Affordable (MHA) Home Affordable Foreclosure Alternatives (HAFA) clearly state on their HAFA matrices that they 1) allow imminent default, that 2) borrower can be current, and/or that 3) mortgage payments are/can be required through a short sale, these same lenders continue to state or imply a short sale will not be considered until the mortgage payment is delinquent.
The lender required mortgage delinquency required prior to a short sale approval is automatically prolonging past short sellers from obtaining an FHA mortgage for three years and a VA mortgage for 2 years.
Short sellers who do not have mortgage delinquencies prior to a short sale are eligible for an FHA or USDA mortgage after the short sale with no waiting period.
This lender practice also threatens to jeopardize current efforts to establish a short sale specific credit code to track consumer habit for past short sellers. If the lender practice of requiring a delinquent mortgage payment for a short sale is not stopped, the credit risk model will be skewed, based on a “lender inflicted delinquency requirements” rather than “true consumer habit”.
Additionally, the lender practice of “Dual Tracking”, which allows lenders to proceed with a foreclosure even though the homeowner is proceeding with a short sale muddies the water, coding short sales as foreclosures even when homes are closed as a short sale.
On 11/1/2012, New Short Sale Guidelines provided by FHFA also provided an updated list of ten hardships listed on the August 2012 Form 710 that allowed short sellers to proceed while being current on their mortgage. However, lenders ignore or are unaware of the ten hardships and continue to use the original four hardships of death, disability, divorce or distant relocation. Denials either list one of these four hardships or don’t list a denial reason at all when underwater homeowners try to proceed with the short sale while being current.
Negative Credit Domino Affect
Ex-spouses who are on the deed but not on the note for a mortgaged property through a divorce and then can’t get help for a HARP or streamline refinance or modification are left with the option to short sell. When the mortgage lender requires a delinquent mortgage payment in order to proceed, this damages the credit of the divorced ex-spouse that is on the note.
Widows, widowers and ex-spouses who are on the deed but not on the mortgage are being ignored by their lenders when they plead for modifications, streamline refinances and HARP help. Lenders won’t talk to these homeowners until they go delinquent on the mortgage, then making these underwater homeowners ineligible for the help they needed in the first place.
No Refinance Option Available at All!
For underwater homeowners who have a conventional portfolio loan that is not a Fannie Mae, Freddie Mac, FHA, VA or USDA mortgage, there is no refinance option available at this time. Though the Obama Refinance Plan was introduced in 2012, the program did not get approved by Congress. So, what’s the holdup?
HARP 2.0 Working But Not Being Used to Full Potential
HARP 2.0, a refinance program available to Fannie Mae and Freddie Mac homeowners who are current on payments on negative equity properties, is not getting the traction it could have due to individual lender “overlays” that restrict maximum loan to values for underwater homeowners.
Innovative programs that promote HARP with unlimited loan to value and pure guidelines, such as the Loan Value Group program, are often met with resistance in states where a full implementation of the program benefits could help the most underwater homeowners.
HARP is maligned by some who state the program adds more negative equity to already underwater home values. However, the best use for this program is to reduce the term along with the lower interest rate, which results in equity escalation quicker. And in many cases, the 15 and 20 year HARP interest rate costs are lower than non-HARP shorter term costs.
As of March 27, 2013, FHFA announced a new Streamlined Modification Initiative that offers a lower interest rate with little or no documentation regarding hardship for homeowners that are 90+ days late. However, the remedy is a 40 year term, with principal forbearance for some, both which increases the negative equity on the loan. Though the initiative is meant to help those truly in need, there is concern that the program may slow down the growing success of HARP if homeowners interpret the program as an easier and less costly way to reduce their payments.
Lack of Knowledge of Qualifications for Short Sellers to Be Current
Realtors and title companies are unaware of guidelines that allow homeowners to proceed with a short sale while being current, that the list of hardships has expanded, and that there are qualifying ratios that determine eligibility for a short sale. Instead, “fast track”, where underwater homeowners get help after being delinquent is promoted by major lenders as the program that is easier and quicker to get an approval for at homeowner help seminars.
Lenders have little or no knowledge of disasters such as Chinese drywall or sinkholes, often requiring costly repairs that the homeowner could not initially cover, which then results in a foreclosure, even though natural or man-made disaster is listed as a hardship.
Respectfully said by one in the trenches daily with these growing problems, we need to consider another direction.
Underwater homeowners are looking for ways to either stay in underwater homes and regain equity as quickly as possible, or exit these homes with credit intact to go forward.
This site will attempt to show solutions that can work and put the underwater homeowner population, both past and present, on a path going forward.
Again, to emphasize the number of affected U.S. citizens:
- 2.2 million past short sellers
- 13 to 16 million currently underwater homeowners
We must pay attention. Our economy depends on it.