Housing Counselors Hone Skills for Service That Will Assist Those with Past Short Sale, Deed-in-Lieu or Modification Where Credit Shows Up as Foreclosure

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.


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.

 

 


Thank You, National Consumer Reporting Association!

Error of foreclosure placed on past short sale credit found in credit report code!

Renee Erickson, Acranet credit/NCRA board member, got the ball rolling….

Terry Clemans, NCRA Executive Director, wrote about this and took a group to Washington, D.C. to meet with U.S. Senator Bill Nelson, the Consumer Finance Protection Bureau (CFPB), and Director, Richard Cordray. 

Brian Webster, who was put in charge of getting the problem fixed. Mr. Clemans, and the NCRA also worked with Fannie Mae.

The NCRA has 64 credit reporting agencies across the U.S. that work with mortgage companies and consumers to “get credit right….

“Thank you, National Consumer Reporting Association, and for your continued efforts to help consumers…”


How the Consumer Financial Protection Bureau Helped!

CFPB.largest.32638950-859f-11e2-810d-2d54590909ce

The erroneous foreclosure code on past short seller credit was taken to the Consumer Financial Protection Bureau (CFPB). Senator Bill Nelson of Fl. demanded that the problem get fixed as it was affecting the state of Florida in a big way. The CFPB worked with Fannie Mae on a solution that came out on Nov. 16, 2013, but it did not work.

So, complaints started being placed with the CFPB on banks that would not change the credit code to other than a foreclosure….. and it worked!

It was also learned that in fact the code could be changed! On August, 16, 2014, Fannie Mae came out with a second workaround and changes have bee evident since then. The problem is still in the Freddie Mac system, but hopes are this will be corrected soon. Thank you to the Consumer Financial Protection Bureau (CFPB), Brian Webster with the CFPB, Fannie Mae, Senator Bill Nelson who got the ball rolling and pushed hard to get this problem resolved, and the National Consumer Reporting Association who took this to the CFPB in the 1st place and whose 64 members have been working diligently with mortgage consumers across the U.S.!


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.


FORECLOSURE code did not affect FHA or VA

The FORECLOSURE code did not affect FHA or VA loans due to the Total Scorecard secondary automated underwriting system that runs parallel to the Fannie Mae and Freddie Mac automated system. Total Scorecard allows an approval but designates there may a property in foreclosure and requires that this be checked in underwriting.


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!


Confusion about Short Sale: LENDERS require delinquency, but CREDIT IS IMPORTANT to homeowners!

“One time life event mortgage defaulters are vastly different than chronic mortgage defaulters,” states the May, 2011 Financial Summit/TransUnion/Life after Foreclosure and Hidden Opportunities article.  

Judgment en-masse… how could people undergoing such hardship  have credit that seemed to be intact? And if credit was intact, these homeowners must really be strategic defaulters.

The reality was that short sale lender policy required mortgage delinquency in order to get short sale approval… then… and most still require delinquency now. And homeowners were wiping themselves out financially and feeling humiliated that they had not seen this coming. 

 The common thread in hundreds of cases we have worked on can prove that homeowners did everything that they could to stay afloat and hang on – until they could not any longer. Credit was of utmost importance to the overwhelming majority of the homeowners who were affected by short sale.


Short Sellers labeled as “Strategic Defaulters,” even though Lenders Required Default!

The second problem causing a backlash against short sellers is that the press was reporting that short sellers were “strategically defaulting,” or choosing not to make their payments even when possible, when reality was that SHORT SALE LENDERS REQUIRED MORTGAGE DELINQUENCY to approve a short sale. Homeowners allowed 3-way calls to confirm this was being told to them by their lenders… and the homeowners were telling the truth. Loss mitigation practices for most investors require mortgage delinquency for a short sale approval… to this day.


The Root of Problem: Lender required delinquency policy needs to be changed!

Loss mitigation practices for most investors require mortgage delinquency for a short sale approval in the first place and that policy continues today.

If underwater homeowners were given an option to stay current through the short sale process, lenders would receive a greater net amount for the property.

If given the option, homeowners would stay current to keep credit built over a lifetime intact, even with hardship.

That is how important credit is to these consumers. Credit is the benchmark for the mortgage industry. This policy is knowingly destroying consumer credit and needs to be changed!


A Public “Thank You!” to Fannie Mae and a Request for Conventional Hardship Counseling Certification for Past Short Sellers

A Public “Thank You!” to Fannie Mae and a Request for Conventional Hardship Counseling Certification for Past Short Sellers

Dear Mr. Watts;

First, Thank You to Fannie Mae for the August 16, 2014 Desktop Originator [1]”fix” that provides  for past short sale credit reported as a FORECLOSURE to be corrected! This allows thousands of eligible past short sellers to  re-enter the housing market!

There is another problem we need your help with: confusion of real hardship with strategic default.

Underwriters are now reviewing more borrowers  who had a past short sale. Many underwriters have a problem with the fact that the mortgage was on time and then all of a sudden went delinquent right before the short sale and  assume these folks were strategic defaulters. However, an overwhelming majority of underwater homeowners were told by their lenders that they could not receive help unless the mortgage was delinquent. A massive number of short sellers will tell you they went delinquent because it was the only option given to them by their lender to get a short sale approval. Further, it can be proven that a massive number of these folks stayed in their homes until they could not do so any longer.

Staying current was a struggle. Hardship is what forced the short sale.

In the midst of  the worst recession in U.S. history, many underwater homeowners wiped themselves out, emptying 401K’s and savings to stay afloat. The hardship was the circumstance that occurred when these folks were at the end of their rope, and had no option left except to short sale.

And, yes, there were those who took advantage of the system. But the great majority continued to make payments, expecting to gain back equity and eventually move on. However, there are areas across the U.S. where appreciation has not happened fast enough and life events have resulted in continued short sales for underwater homeowners (approximately [2]9.1 million per RealtyTrac in July  of 2014).

FHA has “Back to Work” Certification

The Federal Housing Authority (FHA) has a [3]”Back to Work” program, where those who have had a past short sale, foreclosure or bankruptcy can get a certificate from a HUD Approved Counselor where hardship existed and where  a 20% reduction in income was sustained for 6 months or more. In acceptable circumstances, a new FHA mortgage can be approved one year after the short sale, foreclosure or bankruptcy as another option to the three year wait required now.

Could FHFA allow a Hardship Certification from a HUD Approved Counseling Agency or Private Mortgage Insurance Company (PMI) for conventional mortgages?

Why? Because underwriters unfamiliar with problems surrounding short sales are turning down qualified conventional borrowers with extenuating circumstances at the two year mark after a short sale.

Real Hardship Examples

A husband loses his job after a brain aneurysm. The medical crisis causes the couple to file bankruptcy, but they continue to pay the mortgage on the wife’s salary alone. Soon, it is evident the husband will no longer be able to work. It takes 18 months to get Social Security Disability for him and the underwater home is put up for a short sale. The short sale takes almost two years with two contracts that fall apart due to the lengthy short sale process.  The employed wife struggles to make the house payments, wiping out the 401K’s of both her and her husband. The wife is told she must go delinquent in order to get a short sale approval, so she does. Two years later, the wife attempts a new mortgage. The underwriter turns her down, stating she made the mortgage payments after the bankruptcy. The wife asks, “how hard does my hardship have to be?”

Another couple kept their underwater property as a rental. Both moved to another state for jobs, rented out their home and paid monthly for  the difference between rent received and the mortgage payment. 401K’s and savings reserves were wiped out to cover the difference of funds needed. When they lost their final tenant, the options were to short sale or go into foreclosure, as all funds were depleted. They short sold the property.

Please allow trained HUD Counselors or PMI Underwriters to provide a certification for hardship to prove Extenuating Circumstances.

Lenders will not approve a short sale unless a hardship exists. Questioning hardship requires that borrowers must revisit a difficult time all over again. Allowing those trained with allowable criteria to determine real hardship and provide borrowers with an option to layout their story to an unbiased third party can make a difference in the growth of the housing market.

Sincerely,

Pam Marron NMLS#246438

Florida Mortgage Broker

 

[1] Desktop Originator/Desktop Underwriter Release Notes/DU Version 9.1 August Update/June 17, 2014   https://www.fanniemae.com/content/release_notes/du-do-release-notes-08162014.pdf
[2] U.S. Homes Underwater Stalls at 9.1 Million in Second Quarter as Home Price Appreciation Slows in Many Marketsc.com/July 24, 2014/RealtyTrac                     http://www.realtytrac.com/content/foreclosure-market-report/us-q2-2014-home-equity-and-underwater-report-8118
[3]Back to Work Program: Get Your Certificate    http://backtoworkprogram.org/

 


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.