By Jennifer Waters, MarketWatch Here’s some good news for the thousands of consumers who were shut out of a mortgage because Fannie Mae’s coding system couldn’t differentiate between a foreclosure and a short sale: Fannie Mae says it will fix the problem by mid-November. Underwriters and credit bureaus blamed the federal mortgage-backing behemoth’s standardized computer software because it didn’t have a unique code for short sales, leaving many of them to be treated as foreclosures. The distinction is a big one. Under Fannie Mae’s “derogatory event” category, the difference could cost a borrower three to five years of waiting time before they could get another mortgage. A foreclosure, in which homeowners walk away from their financial contracts with lenders, can taint a credit score for as long as seven years, depending on other negatives in a credit report. Fannie Mae’s systems generally will kick out potential borrowers with foreclosures on their credit reports if the mandatory seven-year period hasn’t passed. (There are some exceptions, however.) Bloomberg The Fannie Mae headquarters in Washington, D.C. A short sale, when homeowners work with a bank to sell their home for less than the outstanding mortgage, isn’t given such harsh treatment. The waiting period between filing for a short sale and applying for a new mortgage is generally two years. “This has been flying under the radar for some time,” says John Ulzheimer, credit expert at CreditSesame. “The code was reading short sales as foreclosures and the two are not remotely related.” This wasn’t really an issue before the housing bubble burst. A short sale was a rare occurrence and there has always been a work around for the inconsistency. It required loan providers to take the mortgage out of the Fannie Mae computer system and manually underwrite it with more documentation. Short sales shot up in early 2011 to represent nearly 25% of all distressed sales, according to RealtyTrac, the online marketplace for real estate data, and account for more than 2 million distressed sales since the onset of the housing crisis five years ago. It wasn’t until Sen. Bill Nelson (D-Fla.), responding to an April Tampa Bay Times report on the problem, shot off letters to the Federal Trade Commission and the Consumer Financial Protection Board that the wheels of reinvention began turning, though. “This is the nature of the evolution of this business,” says Fannie Mae spokeswoman Keosha Burns. The agency will input the new software into its computer system on Nov. 16. After that, if a short sale is marked as a foreclosure, the new code will allow the loan servicers to bypass it, correct it and more forward with the loan.
Posted on: Wed, 25 Sep 2013 15:22:37 +0000
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