NMP National Mortgage Professional November 2020

Code Red On Mortgage Credit

Foreclosure code on past short sale credit may be an issue again. This time we know what to look for.

BY PAMELA M. MARRON | CONTRIBUTING WRITER, NATIONAL MORTGAGE PROFESSIONAL

The onset of the 2008 housing crisis presented unique credit issues that mortgage professionals had never dealt with in the past. One of those issues was that past short sale credit was inaccurately coded as a foreclosure that resulted in a seven year wait for a new conventional Fannie Mae or Freddie Mac mortgage, instead of the fouryear wait required after a short sale.

No specific short sale credit code was ever made. However, Fannie Mae created a workaround “fix” in 2013. There may now be an issue with the workaround.

After the housing crisis, I worked with past short sellers who were eligible for a new mortgage two years after their short sale with 20% downpayment. The inaccurate foreclosure code was not visible on the tri-merged credit report. But when the loan was run through Fannie Mae’s automated underwriting system (AUS), a Refer/ Caution denial resulted with an explanation “it appears there is a foreclosure on the credit…” along with the inclusion of the account, borrower name and 4 digits of the account number.

Affected client credit reports and AUS findings were analyzed with Acranet Credit who brought this problem to the attention of the National Consumer Reporting Association (NCRAinc.org). The NCRA Executive Director, Acranet and I took this issue to the Consumer Financial Protection Bureau (CFPB. gov). By analyzing the credit reports of affected consumers, it was determined that the foreclosure code did not show up if the mortgage was 120 days delinquent or less, noted as a “4” on the credit payment history. Mortgage payments over 120 days delinquent and coded as a “5 through 9” in the payment history resulted in the foreclosure code.

EARLY QUESTIONS

Finding a method to individually look at each credit bureau’s data to be able to visually target which bureau was negatively affecting a client’s credit became a priority.

When large numbers of past short sellers being turned down for a new mortgage started coming forward, one of my clients went public in a Wall Street Journal article. In addition to stating that he was getting denied for a new conventional loan even though eligible to be approved, the client stated that their bank told them they had to be delinquent on the mortgage first in order to get help for a short sale. (This was a common requirement of lenders that I’ve heard often when on recorded calls with past short sellers and their lenders.) After the WSJ article, I was contacted by the CEO of that large bank to ask what was needed to help the client. I asked that the credit be downgraded from a foreclosure. This was done, new credit was pulled, and the client received an Accept/Eligible approval through the Fannie Mae AUS. This is when it was discovered that banks can change the credit code on their end.

It was decided that Fannie Mae would do a “workaround” or “fix”when the inaccurate foreclosure code showed up on past short seller credit in the Fannie Mae DesktopAUS in 2013. I was excited about the workaround, had clients ready to input and told mortgage colleagues across the nation about the “fix”.But the initial rollout of the fix did not work well. Out of desperation, I submitted the files of clients where the workaround didn’t work to the Consumer Financial ProtectionBureau (CFPB), an option that enables the CFPB to contact the lender. Within 15 days of contacting lenders, credit was changed, and a refer/Caution was able to be changed to Accept/Eligible.

THE FIX IS IN

The Fannie Mae workaround wasfinally fixed and working in 2014.Also at this time, approved shortseller credit showed a row of “4”s inthe payment history.

For the first time in years, I havehad an experience where the FannieMae workaround for past short salecredit where foreclosure code isapplied… and it did not work.

There is no credit code for a shortsale. We now have credit tools thatallow us to see exactly which bureauis most likely the cause for theforeclosure code. Our credit bureausare capable of making new creditcode. We need to get a specific shortsale credit code now.

Stay tuned.

Pamela M. Marron is a senior loan originator with Innovative Mortgage Services Inc.