Login  /  Register  | 3 premium articles left before you must register.

The Nation's Housing: When short sales leave sellers short

By KENNETH R. HARNEY

Publication: The Day

Published May 17. 2013 4:00AM

Are large numbers of homeowners who have negotiated short sales with lenders at risk because of a startling omission in the American credit system? Do their credit reports and scores indicate that they were foreclosed upon, rather than having negotiated a mutually agreeable resolution with their lender?

The answer appears to be yes, and last week two federal agencies - the Federal Trade Commission and the Consumer Financial Protection Bureau - were asked to investigate why. The reality is this: The credit reporting system now in place does not have a separate code that distinguishes a short sale from a foreclosure. Yet there are crucial differences between the two:

• In a short sale, the bank approves the sale of the house to a new buyer at a mutually acceptable price. Any unpaid remaining loan balance not covered by the sale proceeds may then be either partially or fully forgiven. The bank is an active participant throughout the process, negotiating for a higher price and higher repayment of principal from the original borrower.

• In a foreclosure, the bank is essentially left holding the bag. The owners walk away at some point or live in the property rent-free until they're evicted. Frequently there is damage to the house left by the departing owners, sometimes extensive. There is little or no cooperation between them and the bank.

Both transactions are serious, negative credit events for the borrower. After all, the mortgage wasn't fully repaid. But the financial losses generated by a foreclosure typically are more severe for the lender than a short sale. Not only are there extended periods of nonpayment by the borrower but there are also substantial property management expenses, renovation costs, local property taxes and insurance while the house is being readied for resale. In some parts of the country, the average time to complete a foreclosure has exceeded two years.

The nation's major sources of mortgage financing - Fannie Mae, Freddie Mac and the Federal Housing Administration - all recognize the differences between short sales and foreclosures in their underwriting policies regarding new mortgages. Fannie Mae generally won't approve a new mortgage application by borrowers with a foreclosure on their credit report for up to seven years, but will consider lending to people who were involved in short sales - and who otherwise qualify in terms of recent credit behavior and available down payment - in as little as two years.

But if short sales routinely show up in credit reports coded as foreclosures, borrowers who might be capable to qualify for a new mortgage two or three years after a short sale find themselves shut out of the market. George Albright, who completed a short sale on his home in New Port Richey, Fla., in 2010, has been trying for months to get through the hoops for a Fannie Mae conventional mortgage. According to his mortgage broker, Pam Marron, Albright has a solid 720 FICO credit score, 20 percent down payment cash and more than adequate monthly income and reserves for a new home. But he keeps getting rejected because his credit report indicates a foreclosure, not a short sale.

That's not unusual, said Marron, since there is no specific code to identify short sales. In a highly automated and strict underwriting environment, lenders go by the codes, according to Marron, harming creditworthy applicants like Albright.

"I did my time," said Albright in an interview. "I'm ready to move on," but because of the inadequacy of current credit reporting practices "I'm still paying more for rent than I'd be paying on a new mortgage."

Following a Capitol Hill hearing May 7 on credit reporting issues, Sen. Bill Nelson, D-Fla., sent requests to both the FTC and the CFPB to investigate what he called the "disturbing practice" of misidentifying short sales, and to "penalize responsible parties in the mortgage- and credit-reporting industries, if they don't fix this coding problem within 90 days."

Nelson said real estate industry data indicate that there have been 2.2 million short sales nationwide during the past several years. Consumers who opted for a short-sale route rather than a more costly foreclosure are now being blocked from "re-entry into the housing market," he said, thereby "stifling economic recovery for all homeowners."

Officials of the main trade group for the credit reporting industry, the Consumer Data Industry Association, were not available for comment on Nelson's short-sales complaint to the federal agencies.

Ken Harney's email address is kenharney@earthlink.net.

News by Town

Most Recent Poll
How are you feeling about recent government moves that have targeted nonprofit groups and wiretapped reporters' phones?
This has been a very bad week for Obama and it's only Wednesday.
6%
I'm willing to reserve judgment until the investigations provide the how, who and why behind the IRS intrusions and secret AP phone wiretaps.
18%
If Obama were a Republican, the outcry would be deafening.
37%
I don't think it's fair to lump together and blame the president for Benghazi, the IRS actions and Justice Department wiretaps.
17%
Obama is showing himself in the same league as Nixon.
22%
Number of votes: 1311

No current items found