By Pam Marron | National Mortgage Professional Magazine |July 2017
Step One… Loan Originators and Realtors need to ask ALL clients if they’ve had a short sale, Deed in Lieu (DIL) or loan modification in their past. If they have, run the loan through Fannie Mae and Freddie Mac automated systems first to see if foreclosure credit, a “dispute” or incorrect “Date Reported” exists.
Step Two… spread the word that HUD approved housing counselors can assist these clients to correct (not temporarily hide) erroneous credit to get affected consumers “mortgage-ready” ahead of signing a contract.
Many of nearly 3 million consumers with a past short sale, over 5 million who have had a loan modification and an unknown number with a past DIL need urgent attention to correct a credit error known about since 2011. Affected past homeowners are now eligible to purchase a home again but are being denied new Fannie Mae and Freddie Mac conventional financing where their credit for a short sale, deed-in-lieu or modification shows up as a foreclosure and results in a new loan denial.
The initial problem is when short sale, DIL and modification credit shows up as a foreclosure, often anticipated if past late mortgage payments went over 120 days.
When the affected consumer is told their credit wrongly shows up as a foreclosure, a “dispute” is placed on the account which simply hides the credit from the Fannie Mae and Freddie Mac automated systems… and then must be deleted when the client applies for a new mortgage. (A new change to the Fannie Mae “dispute” policy will take effect on July 29, 2017.)
And, because the account was re-investigated after the short sale, DIL or modification closing date, the “Date Reported” becomes more current, causing the automated system to provide a denial because it appears that the required wait timeframe has not been met.
Loan originators often proceed with processing a new mortgage after checking the required wait timeframe against the closing date of the past short sale, DIL or modification. But sometime during the process or even as late as underwriting, the loan is run through either Fannie Mae or Freddie Mac automated systems where the problem is first seen. Many lenders are unaware of the Fannie Mae workaround (there is no workaround for Freddie Mac!) and often tell blind-sided consumers to “go get your credit fixed and come back.” With the limited supply of housing inventory, sellers are reluctant to extend closing dates for additional time needed to investigate the credit error. Many homebuyers either lose the contract due to the delay to get this fixed or change their loan type to a higher interest rate portfolio loan or an FHA loan.
It makes sense to engage the housing counseling industry into a pre-purchase solution. Loan originators are driven by contract deadlines. Non-profit housing counseling agencies work with clients on the “heavy lifting” to get issues corrected. And HUD approved housing counselors were able to verify “Economic Events” for extenuating circumstances for the past FHA “Back to Work” program.
Leading this initiative is the National Foundation for Credit Counseling (NFCC.org), a non-profit organization with HUD approved housing counselors and credit counseling services. The organization is training and testing solutions to address known fixes, with an emphasis on assisting affected consumers before they even sign a contract. The goal is to alert the real estate and mortgage industries of this service to get potential affected clients “mortgage ready” before sending them back to the real estate and mortgage professionals.
Providing this individualized service to those with a past short sale, DIL or modification who want to purchase a home again is a tremendous relief to these consumers who don’t want to relive their past nightmare again.
This pre-purchase assistance needs to be promoted to affected consumers, the mortgage and real estate industries, loan processors and credit reporting agencies. Correcting issues can be as quickly as 1 day to 60 days.
This will be an up-front fee paid service from an individual housing counselor. Loan originators who wish to assist these clients can refer them to HUD approved housing counselors who have been trained on how to get these unique credit issues corrected once and for all. Then, when the client is deemed “mortgage ready”, they can come back to the loan originator who can provide a credit back towards mortgage closing costs when these folks are ready for a new mortgage.
Everyone benefits. Stay tuned.