Though you probably don’t know about this issue unless you’ve actually had a short sale and found that you are now being declined for a new home loan in the aftermath, the government (Fannie Mae) messed up big time in the wake of the “mortgage meltdown.” Interestingly, it hasn’t captured many headlines that private companies do for lesser accidents. Most interestingly? The whole root of the problem is because of a simple code error in Desktop Underwriter, Fannie Mae’s underwriting system for home loans.
Without getting into too many of the gory details the net net of the issue is this: Fannie Mae didn’t (and still doesn’t) have the proper “code” for identifying short sales in a borrower’s credit file. Instead of spending the time (and I can’t imagine it takes that long) to figure out how to develop a new one, they classified short sales with a different code: Foreclosure.
Though the actual impact to your credit score isn’t much different for the two events ( a default’s a default) there is one huge one: In a short sale, the lender walked away with some money, and presumably, and the seller made a valid effort to not default entirely on the loan. As a “reward” for that, the “punishment period” you must wait to apply for a new home loan following a short sale is much shorter than a foreclosure. (Three years compared to seven). But with the coding error on behalf of Fannie Mae, all those short sellers probably would’ve been financially better off to just stop making payments and foreclosed. Here’s why: Fannie Mae’s error means people who have had a short sale can’t move forward. They can’t take advantage of historically low interest rates–regardless of how much they have for a down payment. Though our friend’s at Fannie Mae have publicly identified November 16th as the day there will be a fix in place, this issue has been run up the flag pole through the Consumer Financial Protection Bureau for quite some time. Thanks to the current government shutdown and whatever is going to happen with the debt ceiling, I’m not holding my breath for that resolution.
I know what you’re thinking: Why should someone who has had a short sale be allowed to buy a new home now? Well, financially, I don’t disagree. But we live in a country that is supposedly forgiving, and frankly, we turn our cheek to just about everything else. We elect government officials with plenty of sordid pasts. We continue to buy from brands that wrong the environment horribly. (Be honest–how long did it take for you to end your resolve against BP after the oil spill)? Demonize the short seller all you want, but the fact of the matter is, short sales certainly aren’t the path of least resistance, and they happen for all kinds of reasons: Divorce, being “underwater” on the value of a home thanks to the falsely inflated housing prices our own mortgage economy helped to create, and in some cases, just realizing that your income can’t sustain the cost of the house in which you live.
The problem is, Fannie Mae can’t seem to fix a code that denies otherwise financially stable home buyers–and hasn’t addressed the reasons our housing market is in its current state. You can still buy a home with nothing down. In fact, I know a couple (now defaulting on their home loan), who were approved to buy a first home with nothing down (one that cost more than the own I own though my husband and I make four times what they do). Neither has a college degree, and neither has any form of sustainable work history. Now neither of them have jobs, and this is one more foreclosure that will be sucked back into the system. But, until there’s nothing in your credit file, there will be a mortgage loan officer who will make that American dream happen.
