Short sale credit coding glitch could suppress real estate recovery
Jun 17, 2013 “Share your voice on Yahoo! websites.”
Problems associated with foreclosures and short sales continue to mount as new ones continue to pop up.
The latest example: A glitch in the credit reporting system (Metro2) that can keep those who exit their homes through a short sale from qualifying to purchase a new home for much longer than they anticipated could suppress the real estate market.
The problem lies with the software program used by the credit reporting system. We have heard from clients, and have independently confirmed through research, that the system does not have a separate code that recognizes the difference between a short sale and a foreclosure in the real estate market. The coding system is used by the three major credit-reporting organizations TransUnion, Experian and Equifax.
To understand why this is a problem, it’s important to understand the differences between a short sale and a foreclosure.
In a short sale, the bank must approve the sale of a house to a new buyer at a price that is acceptable to it, the buyer and the seller. Any unpaid loan balance that isn’t covered by the proceeds from the sale can either be partially or fully forgiven. The bank plays an active role throughout the process and can negotiate with the new buyer for a higher price and higher repayment of principal from the original borrower. Banks have begun approving short sales more than in the past because they are cheaper and are less of a problem than foreclosures.
However, in a foreclosure, the bank is left holding the bag. The owners who are in default can either walk away or live in the property without paying their mortgage until they’re kicked out. Often, there is no cooperation between the defaulting homeowner and the lender.
To add insult to injury many lenders are still requiring mortgage delinquency in order to move forward with a short sale, even after the FHFA New Short Sale Guidelines issued Nov. 1, 2012 which allows homeowners to go ahead with a short sale while being current on their mortgage if they have an eligible hardship.
So what does this mean to those who have taken the short sale route? With no specific code for short sales, those who sold their homes in this manner, played by the banks’ rules, and who want to re-enter the market are being treated by lenders – specifically Fannie Mae and Freddie Mac — like those who simply walked away from their home letting a bank take it back in a foreclosure.
While getting a mortgage after a short sale can take just a couple of years, getting a mortgage after a foreclosure can take considerably longer – sometimes up to 7 years. This has, and will continue to drag down the recovery of the housing market. Ironically, banks also are being hurt by this glitch, because they are being prevented from making new loans.
And, the coding error might not just impact a short-seller’s ability to get a new home loan, it also can potentially have a negative effect on their ability to get other credit as well.
Homeowners who find themselves caught up in this coding mess do have a solution.
Before closing on a short sale, obtain a letter from the lender indicating that the loan closed as a short sale and that any codes indicating it was a foreclosure should be deleted. The letter should be sent to your credit reporting agencies such as Experian, Equifax or TransUnion.
Of course a longer-term solution would be to add a short sale code to the credit coding system, but knowing how slowly things work in the world of banking and credit, taking matters into your own hands now is more likely the better of the two solutions.
Real estate and foreclosure defense attorney, Roy Oppenheim left Wall Street for Main Street, founding Oppenheim Law along with his wife Ellen in 1989 in Fort Lauderdale, Florida, and is vice president of Weston Title and creator of the South Florida Law Blog, named the best business and technology blog by the South Florida Sun-Sentinel. Follow Roy on Twitter at @OpLaw or like Oppenheim Law on Facebook.