A short sale is one way to avoid a foreclosure. In some instances, though, when a borrower ends up completing a short sale, Fannie Mae has inaccurately reported the loan as foreclosed. This inaccurate information can prevent the borrower from getting a new mortgage later on.
A recent class action suit, Banneck v. Federal National Mortgage Association, addresses this issue. If you’ve been denied a mortgage because you previously went through a short sale, but Fannie Mae improperly reported it to the potential new lender as a foreclosure, read on.
Before you can understand the Banneck case, you must first understand a little about the Fair Credit Reporting Act, what happens when you apply for a conventional mortgage, and how soon you can get a conventional mortgage after a foreclosure or short sale.
The Fair Credit Reporting Act (FCRA) governs the behavior of consumer reporting agencies (CRAs) and the businesses or individuals that report information to them. Congress enacted the FCRA “to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.” (Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 52 (2007).) (Learn about your rights under the Fair Credit Reporting Act.)
Fannie Mae is a government-sponsored enterprise that buys mortgage loans from lenders in the secondary mortgage market. It purchases “conventional conforming” loans, which means that the loans must be less than a certain amount ($453,100 as of 2018) and have certain prescribed risk characteristics. Fannie Mae then bundles the loans as securities or keeps them in its portfolios. (To learn more about Fannie Mae and how it works, see Who—or What—Is Fannie Mae?)
Lenders that contract with Fannie Mae must lease or license its Desktop Underwriter system (DU System) and use this system when handling mortgage applications. The DU System compiles information contained in the application along with credit data from consumer credit reporting agencies. The DU System then creates what’s called a Desktop Underwriting Findings report (DU Findings Report). The DU Findings Report contains information about, among other things, the applicant’s credit history, creditworthiness, credit standing, and credit capacity.
The DU Findings Report also reflects if the borrower has gone through a foreclosure, short sale, or deed in lieu of foreclosure, and includes a conclusion about whether the applicant’s loan is eligible for purchase by Fannie Mae. Finally, the report includes a recommendation about whether the lender should grant, deny, or approve the loan subject to certain conditions.
Under Fannie Mae guidelines, you have to show that you have re-established credit and wait a specific amount of time before you can get another conventional mortgage loan after a foreclosure or short sale.
Waiting period after a foreclosure. The waiting period is seven years after a foreclosure, but if the foreclosure was the result of extenuating circumstances—like a job layoff, divorce, or large medical bills—and you can document the event and the impact on your finances, the waiting period is three years.
Waiting period after a short sale. With a short sale, the waiting period is four years, or two years if you had extenuating circumstances. (The same is true with a deed in lieu of foreclosure.)
So, if you wait out the obligatory seven or four years after a foreclosure—or two or four years after a short sale—and meet other underwriting requirements, you can then qualify for a new mortgage. (Learn more about when you can get a new mortgage after a short sale.)
In the case of Banneck v. Federal National Mortgage Association, U.S. District Court, California Northern District, No. 17-cv-4657, 2018 WL 2287656, the plaintiffs allege that Fannie Mae (also known as the Federal National Mortgage Association) willfully violated the FCRA, along with a similar law—the California Consumer Credit Reporting Agencies Act—by failing to assure the accuracy of its DU Findings Reports provided to lenders.
The plaintiffs contend that because Fannie Mae improperly reported their short sales as foreclosures to potential lenders due to a glitch in the DU System, the plaintiffs were wrongfully denied conventional mortgage financing. (The lenders mistakenly applied the standard requiring seven years to pass after a foreclosure, rather than the shorter waiting period after a short sale, and therefore denied the plaintiffs' applications for new loans.)
Fannie Mae responded to the suit by arguing that it doesn’t qualify as a CRA and DU Findings Reports are not consumer reports, so it isn’t subject to the FCRA. However, on May 18, 2018, the judge denied Fannie Mae’s motion to dismiss the case and said a decision on whether Fannie Mae is considered a CRA is "best left for later in the proceedings."
In theory, Fannie Mae has fixed its DU System and no longer reports short sales as foreclosures to lenders who are considering loaning money to a consumer. But if you’ve already had a short sale misidentified by a DU Findings Report as a foreclosure, and that inaccurate information prevented you from obtaining conventional financing or refinancing, you’ll want to keep an eye on what happens in this case. Consider talking to an attorney to get information about what you should do in your particular circumstances.
Effective date: May 18, 2018