Computer glitch damages homeowner credit scores

Some homes that were sold short have been erroneously reported to credit bureausas foreclosures.

Statesman Washington Bureau, zkyle@idahostatesman.comJune 14, 2013 


Wendy Bana, 50, a private school principal in California, short-sold her Oregon home three years ago because she had to relocate for a job. Last year, she found her short sale had been miscoded as a foreclosure, dashing her dream of buying a cabin at Lake Arrowhead, Calif.


Michael Son was just weeks away from closing on a three-bedroom ranch house in New Jersey last year when his lender called with bad news.

Despite the advertising executive's 720 credit score and proven ability to make a 20 percent down payment, he couldn't secure the loan. Somewhere in the fine print of his credit history, the short sale of a previous house in 2010 had been misidentified as a foreclosure.

Son withdrew his offer and reluctantly settled into yet another rental with his wife and two daughters, ages 4 and 6.

"It was devastating because you have that home in sight and you spend money for appraisal, for inspection, for your lawyers - I spent about two grand during the home-buying process - and then the bank tells you no, we can't give you a commitment," said Son, 39. "So it's like, what do I do? When can I buy a home?"

Son and millions of other Americans who sold their homes for less than they owed during the housing crisis are victims of automated underwriting systems that misread those short sales as foreclosures.

The confusion arises because the credit bureaus that provide consumers' data to prospective lenders have no specific code for short sales. Instead, they tend to be flagged as pre-foreclosures, charge-offs or "settled for less than full amount" - designations that are just as devastating to credit as the stigma of foreclosure.

As a result, underwater borrowers who managed to get bank approval for short sales suffer the same long-term consequences as those who simply walked away from their homes after defaulting for years.

The glitch hasn't caused many problems in Idaho, said Dawn Justice, president and CEO of the Idaho Bankers Association.

Bankers look at borrowers' credit scores spit out by computers when evaluating loan applications, but they also look over each borrower's credit history and make their own assesments, she said. The score alone shouldn't derail a qualified applicant, especially in a time when banks are competing to make loans, she said.

"At least in Idaho, we're not seeing (the glitch) as a stumbling block to making loans," Justice said.

The Idaho attorney general's office was unaware of the glitch and hasn't received any complaints, spokesman Bob Cooper said.

Lawmakers in Washington are looking for ways to fix the problem.

"Injustice is being perpetrated," said Sen. Bill Nelson, D-Fla.

"Folks are having their whole financial wellbeing affected," Nelson said. "That's wrong."

Last year, 10 percent of all home sales were short sales, for a total of almost 455,000.

Guidelines from government-sponsored mortgage financiers Fannie Mae and Freddie Mac say short sellers should be able obtain a new loan after two years, whereas borrowers who foreclosed need to wait seven years.

Now, short sellers who waited the requisite two years are finding that the coding error means they'll have to wait five more years to secure another loan.

The credit bureaus are considering the creation of a new code for short sales, but it could take up to two years for such a code to roll out, said Stuart K. Pratt, president and CEO of the Consumer Data Industry Association, a trade group that represents credit bureaus.

A quicker solution would be to reprogram Fannie Mae's underwriting system, Pratt said. He said the credit bureaus are willing to make technical teams available to help Fannie Mae interpret the data properly.


Zach Kyle: 377-6464

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