Fannie Mae announced on June 25, 2008 that seasoning for a short sale is now two years versus five years for foreclosure. Here's the announcement:
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
Here's the pertinent section:
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Establishing a new policy for preforeclosure [short] sales. A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action. |
Why has Fannie done this? Because short sales are currently netting 80-82% of Fair Market Value to Fannie--which is more than Fannie gets from an REO sale, not to mention that by the time the property goes to foreclosure, it's worth far less in most areas of the country and has sometimes been vandalized.
http://www.rebuild.org/news-article/foreclosure-and-stripping-homes/
To ensure that the former homeowner is ready to purchase again in two years, s/he should pay all their other debts on time and use no more than 50% credit capacity on credit cards.
The derog will be reported to the bureaus as Score Factor Code #22--"serious delinquency, derogatory public record or collection." There is no other "reason code" that lenders can use to characterize the activity of a defaulted mortgage. As Mr. Zaretsky's Fair Isaac friend said, “default” is considered payment not in line with the original contract terms.
http://www.bayhouse.com/FairIsaac-NextGen-risk-factors.shtml
Depending on the consumer's utilization of other debt, the hit to his FICO could be less than 100 points. Here's a post from another forum where the borrower orchestrated his own short sale at OCWEN and Washington Mutual.
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In March I had my credit checked when I applied for the loan on the new house. I was at 778 and the approval was conditional on us selling the CA home before we could close. We are now partially moved into the new house in South Carolina, waiting on carpet before we can move in the rest. Both Ocwen and WaMu have reported to the credit bureaus. It shows up from both as "ACCOUNT PAID IN FULL FOR LESS THAN FULL BALANCE". My credit score is now 714, for a total loss of just 64 points. Well worth it to me, I still have excellent credit and I don't own a house with -40% equity. I have received letters from both WaMu and Ocwen saying that the accounts are closed and it's a done deal. Thanks to that and the Mortgage Debt Forgiveness Act of 2007, I can sleep well at night now. |
If you'd like to read the entire saga of this consumer's negotiations with OCWEN and WaMu, here's the link:
http://forums.biggerpockets.com/about17168.html
According to the Mortgage Debt Forgiveness Act of 2007, the amount of mortgage deficiency (known as "phantom income") will be forgiven if the house is owner occupied. (No break to investors.)
http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html
I've been a loan originator for nearly 20 years and I can tell you, without fear of contradiction, that prior to June 25, 2008, a short sale and a foreclosure were treated EXACTLY the same by lenders. Now, however, a short sale has a shorter "seasoning" period WHERE LENDERS ARE CONCERNED. Where FICO is concerned, it takes about two years of responsible credit behavior to supplant derogatory credit behavior.
One other thing...if a consumer is obtaining his credit report from one of the online reporting sites, the FICO score he sees will NOT be the same as a FICO score drawn by, say, someone like me who is offering a firm offer of credit.
This statement--"Just like the lender who wants to do a short sale cannot demand it occur, it can only negotiate with the borrower to allow the short sale to go through."--is backwards. Under what circumstances would a homeowner NOT "allow" a short sale to occur? A short sale is to the homeowner's benefit. It's the lender who does the "allowing."
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