Ignoring Potentially 21%
In April, 2014, RealtyTrac came out with a report that showed that 1) 9.1 million, or 17% of all US mortgages (total number of US mortgages calculated at over 53.5 million) were STILL seriously underwater, where the loan amount is higher than the property value. Housing values in many areas are coming back, but not enough to put many of the 9.1 million still underwater homeowners into a positive equity position.
In March of 2013, 2) RealtyTrac reported there were 2.2 million past short sellers trying to re-enter the housing market again.
Past short sellers and still underwater homeowners who may have to short sell in the future equate to potentially 21% of the total US residential mortgage market numbers.
The credit of a great majority of those that "have had to or may have to short sell" is proven to be good, with most professing and pr...oving that keeping credit intact is given the highest priority. However, most underwater homeowners have dangerously high back end debt to income ratios as they borrow against everything they've got to stay put, until they cannot any longer. Many are depleting retirement funds and borrowing from other assets to stay solvent.
And the "strategic default" label placed en-masse upon short sellers from 2007-2009 has been proven to be 3) "relatively rare" suggesting that the greatest indicator of default has been unemployment, and that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults rather than policies that temporarily modify mortgages.
Short sales are not approved unless a hardship exists, and the majority of those affected will not tell realtors or even their lender of hardship endured unless seriously prodded or required to do so.
Short sellers are saddled with an even bigger problem once they are able to exit their home. There is a credit code problem where past short sale credit shows up as a foreclosure. The foreclosure code is borrowed from the Metro 2 system and the code conflicts in the same raw data, where a narrative of "settled for less than full balance" appears with foreclosure credit code. This credit change occurs when a mortgage holder applies for a short sale and when their mortgage credit goes past 4)120 days delinquent.
On Nov. 16, 2013, the Fannie Mae DU version 9.1 became available and was supposed to allow lenders who were receiving a Refer/Caution( denial) on 5) conventional mortgages because the past short sale was showing as a foreclosure, to go into the Fannie Mae system and make a change. Instead, lenders must be given the OK to make the change first by Fannie Mae in verbiage provided in findings. This only works occasionally, and when the lender receives the OK to go in and make the change, the lender must state "YES" to a foreclosure to finalize.
Further, the problem also exists in Freddie Mac, which was unknown prior because Freddie Mac does not give an automated approval on past short sales until four years past the short sale. We now have cases of Freddie Mac denials of short sales, past the four years, miscoded as a foreclosure.
When we start paying attention to the erroneous foreclosure code that is stopping past short sellers from re-entering the housing market and threatens those who may have to short sell with the same, and address that the "fixes" have problems that need to be corrected, then it may be possible to see a shift in the housing market.
1) 9.1 MILLION U.S. RESIDENTIAL PROPERTIES SERIOUSLY UNDERWATER IN FIRST QUARTER, LOWEST LEVEL IN TWO YEARS/April 15, 2014/By RealtyTrac Staff http://www.realtytrac.com/Content/foreclosure-market-report/q1-2014-home-equity-and-underwater-report-8037
2) Boomerang buyers return to market after foreclosure/By Les Christie @CNNMoney March 11, 2013 http://money.cnn.com/2013/03/11/real_estate/foreclosure-homes/
3) UNEMPLOYMENT, NEGATIVE EQUITY, AND STRATEGIC DEFAULT/KRISTOPHER GERARDI, KYLE F. HERKENHOFF, LEE E. OHANIAN, AND PAUL S. WILLEN/WORKING PAPER 2013-4/AUGUST 2013
http://www.frbatlanta.org/documents/pubs/wp/wp1304.pdf
4) The delinquency requirement for a short sale has historically been required by lenders for short sale approval. Recently, lender have NOT been requiring delinquency, or a shortened period such as 31 days, required on an FHA short sale.
5) This was never a problem with FHA and VA mortgages. The Total Scorecard, a secondary automated system, parallels the Fannie Mae Desktop Underwriter/Originator and the Freddie Mac Loan Prospector. FHA and VA mortgages with a past short sale typically receive an approval but with verbiage that discloses there may be a past pre-foreclosure or foreclosure with direction to confirm and adjust per FHA/VA guidelines.
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