Credit Reporting Agencies' Improper Reporting Of Short Sale As Foreclosure Haunts Ex-Homeowner Looking To Get Back Into Real Estate Market

Real estate columnist Kenneth Harney writes:

• 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 answers appear to be yes, and last week 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:
  
  1- In a short sale, the bank approves the sale of the house to a new buyer at a mutually acceptable price. Any unpaid 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.
  
  2- 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 it is extensive. There is little or no cooperation between them and the bank.

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• 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, down-payment cash of 20 percent 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, Marron said, 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 such as Albright.
  
  “I did my time,” Albright said 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.”

For more, see Short sales may be treated like foreclosures by credit-reporting agencies.