Fannie Mae to fix glitch that rejected borrowers
(MoneyWatch) For aspiring homeowners, it's a little fix that can make a big difference.
Fannie Mae this November will change its underwriting software so it no longer rejects qualified loan applicants who had previously sold their homes through a so-called short sale. The mortgage finance company's system instead treated these prospective borrowers as if they had a foreclosure on their credit history, making it hard for them to get a loan.
For borrowers, there's a big distinction between having gone through a foreclosure or a short sale, which is when a home is sold for less than what is owed on the mortgage. Those borrowers with a short sale on their credit history can qualify for a new mortgage in as few as two years, while those with a foreclosure may not be able to get a home loan for up to seven years.
Here's how borrowers were getting stuck: If you want a mortgage, you sit down with a lender. The lender takes down your information and inputs it into a computer that has access to your credit report and other financial information. If the lender wants Fannie Mae to insure the loan, it will use Fannie Mae's underwriting software, called Desktop Underwriter.
When borrowers who had previously sold their homes in a short sale, but were past the initial "time out" period, sat down with the lender to get a new loan, Desktop Underwriter rejected the application. If the borrower could prove the system was wrong, the lender then would have to manually underwrite the loan with extra documentation -- but that didn't typically happen.
As a result, qualified borrowers were told to wait longer, all because of an error somewhere in Fannie Mae's system. It's still unclear exactly where the error originates. Fannie Mae spokesman Andrew Wilson said the problem is not with Desktop Underwriter, which takes data from lenders and credit bureaus.
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But Sen. Bill Nelson, a Florida Democrat who began investigating the issue in May, seems to think otherwise. The "banks and credit bureaus contend the problem lies in the standardized computer software they use, which they say has no special code to report a short sale," he said in a statement at the time.
Fannie Mae's Wilson said the company has separate codes for short sales and foreclosures. A spokesman with Freddie Mac said that home finance agency's Loan Prospector underwriting software also differentiates between a foreclosure and pre-foreclosure options, such as deed-in-lieu and short sale.
But the firms' software differ in a key way, which is why Fannie Mae is offering a fix to its system. When there is a major blemish an applicant's report, Freddie Mac's system won't automatically reject the applicant. Loan Prospector raises a red flag when the lender must seek more information on a borrower, the Freddie spokesman said.
Desktop Underwriter wasn't built with that kind of workaround. Instead, if a borrower reported he had been through a short sale while the system said it was a foreclosure, the system would not allow the lender to continue the application without shifting to a manual underwrite. With the system fix that will roll out Nov. 16, lenders can note the discrepancy and add additional documentation to prove the system's information is wrong and allow the application to continue, Wilson said.
The best way for borrowers to avoid the whole issue is to check their credit reports for errors. Any error (such as listing a foreclosure instead of a short sale) that is spotted can be fixed before the borrower heads into a lenders office, increasing the likelihood the loan application will be approved.
"The bottom line is people have options if they waited the appropriate time," Wilson said. "And we're working on this data issue to provide more."
