It’s estimated that almost 1.5 million homeowners have gone through a short sale in the last 5 years, yet many of those are reporting incorrectly on their credit reports as foreclosures. If you are a Realtor or loan officer, you should know that the difference between a short sale or a foreclosure reported on a credit report can cost a consumer valuable time, money, and delay their entry back into the housing market – and cost you a potential client.
How prevalent is the problem? Well consider that here in the Sacramento area more than 1 in 3 homes that sold in those 5 years were short sales, the number of former homeowners trying to rebuild their credit is gigantic. In 2012 alone, short sales accounted for 32% of all sales, while foreclosures declined to 11%, according to the California Association of Realtors.
Now, with glowing signs of optimism in the housing market, many former homeowners are rebuilding their finances and looking to purchase a home again. Ready to take advantage of lower prices and historically-low interest rates, they’re running into an unexpected obstacle, even when their financial situation is strong: the short sale misreporting as a foreclosure on their credit report.
What it means to the borrower:
A foreclosure and short sale have the same approximate negative affect on credit score, knocking a defaulter down 80-165 points. However, the real difference is that someone who short sells a home will be eligible to purchase again in 1-3 years depending on the loan program and if there was a clear, documented hardship. With a foreclosure someone will not be eligible for a home loan for 3-7 years depending on the loan program.
So the benefit to short selling a home is profound, but still the lenders commonly misreport the negative event on the credit report, and consumers accept the misreporting, not realizing they have recourse to correct it. In the real-time context of a former homeowner trying to get back in the market, a delay of a few years may mean that they are going to pay more for their home in this market of low inventory and high competition, and certainly interest rates have no where to go but up from their historic lows. If their credit score doesn’t rebound from the incorrect reporting of a foreclosure, they will either pay more for a house or have to take on a higher interest rate, which could cost them tens or even hundreds of thousands of dollars over the life of the loan. Even worse, some short sellers are disheartened by the foreclosure on their credit report, and give up the dream of home ownership all together.
The good news is that a consumer does have a procedure to fix this problem, and Blue Water Credit can help hold the credit bureaus accountable to report the short sale accurately, readying your client for that next home purchase in months, not years.
Let's try to explain how this is happening:
The credit trade line is reporting settled for less than full balance or charge off which is accurate. Page 491 and 492 of the Fannie Mae selling guide state the following:
A) 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); or if there is a foreclosure-related Remarks Code present in the credit report data and associated to the trade line.
B) If a foreclosure was reported within the seven-year period prior to the credit report date, the loan case file will receive a Refer with Caution or Refer with Caution/IV and will be ineligible for delivery to Fannie Mae.
It then goes on to state the following about pre foreclosure sales or short sales...
Most banks will not underwrite these loans for now even though they sell direct to Fannie and Fannie says it can be done. Maybe they change their stance in the future but maybe not since there’s a lot of liability that can come with a manually underwritten loan.
So what happens next, and how can Blue Water Credit help?
When a short sale closes, the credit trade line reports as “settled for less than full balance, or charge off,” on the borrowers’ credit report, which is accurate. But there is help to get it clarified as a short sale, not a foreclosure. Here are some things to consider during this process:
1. Realize that this situation is happening with virtually every lender we come in contact with.
2. Blue Water Credit is currently receiving an average of 3 clients a week that need help with this very issue.
3. Once a client hires Blue Water Credit, we will basically start the first leg of a “law suit” against the credit provider that’s misreporting the MOP code.
4. Blue Water Credit will work closely with the Realtor or loan officer who referred the client, communicating frequently with the ultimate goal of turning them into an eligible home buyer once again.
What results can your client expect?
1. About 50% of the time BWC is able to get it fixed and corrected in 45 days and 80% of the time BWC can resolve this issue in 90 days time.
2. Another 30% of the time approximately it gets fixed within 90 days (so basically it’s an 80% success record but can take up to 90 days).
3. If the issue still isn’t resolved then the next step would be to sue the bank and or credit provider. If they were to win the lawsuit, the credit provider would a) fix the MOP code and b) reimburse client attorney fees.
Realtors and loan officers, think about how much higher your sales numbers would be if you had filled your pipeline with post-short sale prospects a year or two ago ! Don’t make that mistake again! Blue Water Credit would love to help you market to this demographic, turning them into credit-worthy homeowners once again who need your services.
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Please contact Blue Water Credit if you have questions, or would like to co-market to potential clients who would benefit from this information.
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