The Perfect Government Catch 22
Did you know we have a serious dilemma.
Years have passed since many of the first short sales have been consummated, many homeowners, who went through a short sale desire to get back into a home and take advantage of the great buying opportunity which exists right now.
Every day we receive requests from both agents and their clients to determine the eligibility to purchase again. The most often stated re-approval terms, if late mortgage payments existed at time of sale, are a 2 year wait when financing conventional with 20% down and a 4 year wait with 10% down. It is a 3 year wait with FHA which is 3.5% down. As it turns out, it is not that cut and dry like we all thought.
As we work through individual case files we have uncovered a serious defect to the system that is causing havoc to the process. Credit reporting with the bureaus does not truly reflect the terms of the escrow the seller really went through. Here is what I mean and the actual guidelines from Fannie Mae are posted below for you to examine.
A short sale is known by Fannie Mae as a pre-foreclosure in all of their guides. DU is Desktop Underwriter which is the proprietary underwriting system of Fannie Mae. In order to sell a loan to Fannie Mae the case file of the borrower must be entered into DU in order to receive a finding of an "accept" or approval. A "refer" means there is a problem.
Now, here is the real issue. When the short sale lender reports to the credit bureaus that a short sale has taken place, the bureaus report it as a pre-foreclose, an 8 or 9 to the seller's credit files. When we run the credit years later and then run a DU, we are receiving "refers" because the system says it is a foreclosure and not eligible to have an approval as the waiting period should be 7 years, the waiting period for a foreclosure.
We contact the bureaus and say we have paperwork that shows the previous bank's written authorization for a short sale as well as a HUD closing statement to back our claim. The credit bureaus will not change the information in their systems because...a short sale is a pre-foreclosure which is a form of..foreclosure.
As you will see below, Fannie Mae guidelines state the lenders must manually apply the pre-foreclosure sale requirements. Perfect a solution. No it's not. Why? Because the investors will not buy the loans unless there is a "DU ACCEPT!"
Pre-foreclosure Sales or Short Sales
. DU is not able to identify pre-foreclosure or short sales in the credit report data. Lenders must manually apply the pre-foreclosure sale requirements to DU loan case files, regardless of the underwriting recommendation received from DU.
. DU will issue a message on loan case files where the borrower's credit report indicates an account may have been released to a pre-foreclosure sale. The recommendation on the loan case file will not be changed when this information appears on the credit report, though as stated above, the lender must ensure the loan complies with all other requirements specific to pre-foreclosure sales as specified in B3-5.3-07, Significant Derogatory Credit Events - Waiting Periods and Reestablishing Credit..
DU applies the following guidelines to prior foreclosures:
. Mortgage accounts, including first liens, second liens, home improvement loans, HELOCs, and mobile home loans, will be identified as a foreclosure if there is a current status or manner of payment/MOP code of "8" (foreclosure) or "9" (collection or charge-off).
So as you can see we have a catch 22