Better Details Needed for FHA Back to Work & Conventional Loan Extenuating Circumstances

By Pam Marron

For past short sellers who have gone through the loss of a home and are eligible to return, criteria needed for a new mortgage is vague. The result is a partial story.

Proving “extenuating circumstances” and confining the timeline for an economic event is a struggle for loan originators and underwriters trying to comply with vague  criteria. Because of so many variables, lenders deny new loans for borrowers with a short sale or foreclosure in their past even when they may be eligible to repurchase again.

We HAVE to get this right. Detailing WHY the loss of a home is the hardest thing for affected consumers to provide… not because they can’t remember, but because they relive it.

In attempting to originate the FHA “Back to Work” loans, it would seem the process is simple. The criteria for “Back to Work” is to show a 20% reduction in income sustained for 6 months minimum that resulted from a loss of employment or reduction in income, which is considered the “economic event”.

Here’s the bigger problem. Most who had an “economic event” tried to hang on, wiping out assets along the way. But, while trying to hang on, homeowners accumulated more debt to stay solvent and in most cases, to stay current on their mortgage.  Then, another “economic event” hit, assets were gone and debt is so excessive that there is no choice but to short sell.

As a mortgage broker in Florida where it is common to see Boomerang Buyers (those eligible to re-enter the housing market after a short sale or foreclosure), I often hear the full story for those who have lost a home and want to re-try home ownership again. An economic event followed by a prolonged period of trying  to stay put, finally ended with another event where funds were no  longer available and the only choice was to short sale, occurred in a great deal of these cases.

Proof also exists to show a good number of these folks  had excessive debt that pushed up debt to income ratios incredibly high prior to the sale of their underwater home.

But, it gets confusing for a new mortgage. For the FHA “Back to Work” program, HUD approved counselors are able to determine hardship and can provide those who attempt a re-purchase one year after a short sale, foreclosure or bankruptcy with a housing counseling certificate.

However, that doesn’t mean the mortgage company will approve the mortgage. Because the economic event may have occurred years ago and short sale processes took months or years, documentation such as tax returns and bank statements needed to show a lack of assets may stretch over the previous five to seven years rather than the most recent two years that lenders are accustomed to evaluating.

Mortgage companies who offer  FHA “Back to Work” are reluctant to promote this almost two year old program due to few of these loans getting approved. Part of this is because loan originators don’t provide enough documentation, and the other problem is that there seems to be wide discrepancy between underwriting opinion on these files.

Varying opinion also exists for “extenuating circumstances” noted in Fannie Mae and Freddie Mac guidelines for eligibility of a new mortgage under four  years. Underwriting interpretation of these guidelines vary greatly from lender to lender for the few mortgage companies who offer these loans.

For loans submitted with what seems to be an iron clad “extenuating circumstance” or proof of the 20% reduction in income for 6 months minimum for FHA’s “Back to Work” program, underwriter opinion seems to vary widely. Some underwriters think the decision to short sale was too soon, while others wonder why homeowners waited. It seems they are trying to justify the sale was “not strategic”.

The income, current credit and assets of borrowers who have gone through a short sale and are trying to re-enter the housing market is more than acceptable per current guidelines. They have to be next to perfect, and they know it. Other than knowledge of the past short sale, these are loans that any lender would want to have on their books.

Those who make policy need to talk directly with affected past short sellers. They need to come to where underwater home problems still exist and see for themselves what is really happening. This can truly help the housing industry recover.

 

 


Underwater and Home Equity Report, 4th Quarter 2014 | RealtyTrac | Jan. 14, 2015

4th Quarter 2014 Underwater and Home Equity Report | RealtyTrac Report | Jan. 14, 2015
SUPERB data collection for Distressed Homeowners and Boomerang Buyers.


Hero… U.S. Senator Bill Nelson (D-FL) May 7, 2013

On May 7, 2013, Senator Bill Nelson of Florida took the problem of short seller credit being erroneously coded as a FORECLOSURE to the Senate hearing on “Credit: What Accuracy and Errors Mean to Consumers.” Senator Nelson is a true hero… and took on the problem of short sale credit erroneously coded as a foreclosure that resulted in a mortgage denial for eligible past short sellers. He demanded that the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) get this problem fixed in a Senate hearing on May 7, 2013. The Consumer Data Industry Association (CDIA) was also included in that hearing.


Thank You, Ken Harney of the Washington Post

For Short Sellers, Some Good News
Kenneth R. Harney, Washington Post – Sept. 6, 2013

Policy changes by two of the biggest players in the mortgage market could open doors to home purchases this fall by thousands of people who were hard hit by the housing bust and who thought they’d have to wait for years before owning again. Read More

 

Short Sales may be Treated like Foreclosure by Credit-Reporting Agencies
Kenneth R. Harney, Washington Post – May. 17, 2013

Are large numbers of homeowners who have negotiated short sales with lenders at risk because of a startling omission in the American credit system? Do their credit reports and scores indicate that they were foreclosed upon, rather than having negotiated a mutually agreeable resolution with their lender? Read More

 


HOW Lender Required Mortgage Delinquency resulted in FORECLOSURE coding for Short Sellers

Lenders require mortgage delinquency in order for underwater homeowners to get a short sale approval.

When the mortgage goes delinquent past 120 days, the mortgage is credit coded as a FORECLOSURE.

Many past short sellers are not aware of this until they apply for a new conventional mortgage 2 years later.

 


FORECLOSURE Code in Conventional Fannie Mae and Freddie Mac Loans

The first time the FORECLOSURE credit for past short sellers was seen was on new conventional Fannie Mae and Freddie Mac findings for eligible past short sellers trying to re-enter the housing market again.


How the National Consumer Reporting Association (NCRAinc.org) got involved!

We worked with Renee Erickson, of Acranet and a NCRA Board member, to show where past short seller credit was showing up as a FORECLOSURE even though the consumer had proof of past short sale. This resulted in denial in both Fannie Mae and Freddie Mac automated underwriting systems. Renee took this to the NCRA (National Consumer Reporting Association).


Short Seller Credit Rebounds – Automated Error Confusion Persists

Short Seller credit is often surprisingly good, in spite of late payments required by their lender for the short sale. Loan files were acceptable for a new loan per Fannie Mae/Freddie Mac guidelines; yet both automated underwriting systems were turning past short sellers down and showing the short sale as a FORECLOSURE! And, there was a reluctance to downgrade the credit from a FORECLOSURE, even with proof in hand!


Past Short Sellers Can Be Homeowners Again!

  • Please note that this problem only existed for conventional mortgages for Fannie Mae and Freddie Mac. Because of the parallel Total Scorecard automated system, FHA and VA loans are not denied in the system. Both Fannie Mae’s Desktop Underwriter/Originator and Freddie Mac’s Loan Prospector require an underwriter to verify the past mortgage was not a foreclosure.
  • The Fannie Mae”fix” did not work on Nov. 16, 2013. However, filing the complaint that with the CFPB does commonly result in the short sale credit code being downgraded.
  • On August 16, 2014, Fannie Mae came out with a workaround that does work. And the Fannie Mae Desktop Underwriter/Originator automated approval system is not providing a denial or “Refer with Caution” for past short sales in most cases. However, the Freddie Mac Loan Prospector automated system still provides a denial.