The Perfect Government Catch 22

By
Real Estate Agent with TIM LORENZ of Keller Williams Realty BRE# 00919781

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..

 

CONTINUED

 

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

Posted by

Tim Lorenz

Instant MLS Listings & Free Market Analysis

"We have actually closed many short sales!"

www.markandtim.com

949-874-2247

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Topic:
Lending / Financial
Location:
California Orange County Mission Viejo
Groups:
Market Reports
Keller Williams 'Rainers
Realtors®
Posts to Localism
Orange County Real Estate
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Comments 28 New Comment

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Rainmaker
791,888
Tim Lorenz
949 874-2247
TIM LORENZ of Keller Williams Realty

Well it is what it is.  It is difficult when the rules are not solid.

May 16, 2012 07:42 AM
Rainmaker
484,580
Curtis Van Carter
Napa Valley's Broker Extraordinaire in Yountville
Coldwell Banker Brokers ofthe Valley, Yountville Napa Valley

Tim

Unfortunately, this information is not known by most of the agents and contrary to what I have been told by even my company managers. I thank you for posting this valuable bit of info and I am forwarding a link to your post to those in my company who handle are short sales training. cheers cvc

May 16, 2012 08:39 AM
Rainmaker
791,888
Tim Lorenz
949 874-2247
TIM LORENZ of Keller Williams Realty

Thank you Curtis it is an important aspect for the new buyers.

May 16, 2012 11:01 AM
Anonymous #28
Anonymous
Jim L

Just wanted to let you know I was in this predicament (I was the homeowner looking for a refi).  I had a short sale on my credit report exactly 27 months prior.  It was a first and a second.  I went thru 5 lenders all decline because of that sole reason described above.  I was even tempted to pay an attorney to legally remove the short sale from my credit report ($4500), but thankfully I didn't.  I happened to call a lady who does credit restoration (in Chicago) and after she reviewed my report she told me that credit restoration is not what I needed.  She told me to go thru a credit union because they use alternative methods to approve a loan.  I went thru NuVision Federal Credit Union in Laguna Hills and they approved me with a great rate and 0 points ( where all other lenders said they would have to charge me a point because of my credit history). So it can be done!!! 

July 11, 2012 03:21 PM
Rainmaker
791,888
Tim Lorenz
949 874-2247
TIM LORENZ of Keller Williams Realty

Jim L

I am so glad to hear you got the loan and were able to purchase a home.  Thank you for letting me know as well as the other consumers that need hope.

July 12, 2012 09:12 AM
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Tim Lorenz

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Additional Information

A real estate professional and investor for over 43 yrs look at the market, the laws, the trends and the condition of the market. A runing commentary of one persons professional's opinion.