How Do I Fix A Zombie Foreclosure?

Boomerang buyers are those families that fell victim to bankruptcy, foreclosure or short sale in the past and are trying to buy again after the hardship.

Most boomerang buyers find solace in the fact that recovery is at most only a few years away.  At least that’s the way it’s supposed to be – except if they have a zombie foreclosure.

Zombie Foreclosures

We recently wrote about Zombie Foreclosures, which is a recent phenomenon being experienced by folks that surrender their home, most commonly after being included in bankruptcy.

Years later, when these buyers are ready to boomerang back into the market, they discover that the bank never foreclosed, and that their name is still on title to a home they have not lived in for years.

Phantom Foreclosures

As a direct lender with a specific expertise in boomerang buyers, we’ve actually successfully navigated many buyers through an epidemic of credit reporting issues resulting from inaccurately reported short sales or deed in lieu of foreclosure reporting as a foreclosure.

Using conventional financing, with 20% down and a minimum 680 credit score, boomerang buyers can buy in a little as 2 years after a short sale or deed in lieu.  Here is an email I received just yesterday that is unfortunately typical of  these faux-closures.

As you know we cant get a refi automatic approval from the DU system due to the MOP codes of 9

Hi Scott – you seem very knowledgable with the Short Sale MOP code nightmare issue.  We had an investment condo close as a short sale in July 2010.  We have a MOP code of 9 on our credit report both the 1st with WF and the 2nd HELOC with another division on WF.   no other derogatory credit – none.

Other than that – we are trying to refi for a better rate in our current primary residence in NorCal.  We owe $382k and the home is valued conservatively  at $575k with 2 recent sales in our neighborhood of $600k for same sq ft as us.  Our credit score is somewhere around 690-715 

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As you know we cant get a refi automatic approval from the DU system due to the MOP codes of 9.  

I’ve written to both WF and WF HELOC asking them to remove the 9 from our MOP payment pattern but I’m not holding my breath.  DO we have ANY options?  I would appreciate any assistance.  

Are there any investors out there willing to buy a solid refi mortgage that didn’t get an automatic DU approval? 

Interestingly enough, I was already planning to write about these phantom foreclosures and ways to overcome these issues when this email came in.  I couldn’t have described a typical phantom foreclosure any better than the story being told by this real live buyer.

I look forward to speaking to this family because we can absolutely help, and have helped many boomerang buyers in this exact situation.  This isn’t a qualifying problem, it’s a documentation and lender experience problem.

How Phantoms Foreclosures Appear

What this buyer is referring to is a status code reported to the credit reporting bureaus by the lender that describes the payment status of the account.  An 8 or 9 that is reported by the lender after a short sale or foreclosure occurs is the exact problem we are talking about.  An 8 represents a charge-off, 9 a foreclosure.

After a short sale or deed in lieu of foreclosure, the account should report as “paid as agreed for less than amount owed”.  Unfortunately, simply having this description on the account is not enough.

If past short sale or deed in lieu is reporting the correct description, but an incorrect status code of 8 or 9, you will most certainly encounter the hurdles we’re talking about.

3 ways to fight a Phantom Foreclosure

For all 3 of these methods for correcting erroneous credit reporting you will need your short sale or deed in lieu agreements from the lender that prove that an agreement was reached.  Depending on how cooperative the parties are, you should be able to get this issue resolved, hopefully without too much trouble.

1.  Contact the lender from the short sale – provide them with copies of the short sale or deed in lieu agreement and ask them to correct the reporting status to the bureaus to reflect the actual number of days the loan was delinquent at the time of the agreement, confirm the reporting of the account paid as agreed, settled for less than amount owed.

2.  Contact the credit bureaus.  First, you want to check to see if all 3 credit bureaus are reporting the debt the same.  It is not uncommon for only 1 or 2 of the credit bureaus to report the short sale incorrectly.  If one or more of the bureaus is reporting the correctly, that’s a good start to making your case with the others.

3.  Talk to your lender.  Some lenders, like Find My Way Home and our affiliates, have the ability to manually underwrite conventional loans.  With proper documentation, we can make a case to the credit bureaus on your behalf and even underwrite the file without an automated DU approval.

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Not All DU Results Are Created Equal

Recently, we have also encountered the interesting experience of receiving a full DU Approve/Eligible in cases where other lenders were unable to get the same results, without any further credit correction being done.

Lenders use credit services to pull credit profiles from all three bureaus, merge all three reports into one report, and deliver this report in a format that can be uploaded to Fannie Mae’s Desktop Underwriter, DU.

In our experience, some of these lenders, or more specifically their credit reporting services, are not formatting this credit data properly which is triggering a Refer/Ineligible in DU.  When run through our credit reporting services we are able to get an Approve/Eligible.

Conclusion

If you are currently in this situation, or if you are planning to buy in the near future after a short sale or deed in lieu of foreclosure, leave me a message below, shoot me an email or give us a call.  As I mentioned above, this isn’t a qualifying problem, it’s a documentation and lender experience problem.