Many short sellers ultimately decided the painful procedure was a more honorable option than foreclosure because it allowed the bank to recoup some of its investment and avoid the costly process of eviction, rehab and resale.
“The bank’s still making fair money and it’s better for the economy,” Bana said. “And I don’t not pay my bills. I had always had perfect credit. To me that was a far lesser evil than just walking away.”
She also thought a short sale would allow her to recover more quickly financially.
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 starting to re-enter the housing market only to find that the coding error means they’ll have to wait five more years to secure another loan.
“It’s extremely stressful,” said former short seller Lisa Chambers, 54, of Chico, Calif., who has been unable refinance her mortgage. “It’s hard on our whole family. We feel like we’re stuck in this holding pattern and we can’t get ahead.”
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 into the marketplace, 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, which doesn’t read the available codes in a nuanced way, Pratt said. He said the credit bureaus are willing to make technical teams available to help Fannie Mae interpret the data properly.
Fannie Mae spokesman Andrew Wilson said the company is aware of a snag with its underwriting system that doesn’t always allow the software to distinguish a short sale from a foreclosure.
“We’re working with the credit agencies on our system to see if there’s another way around this, but in the interim there’s no reason that a borrower who had a short sale previously shouldn’t get a loan if they’ve waited the waiting period and otherwise qualify,” Wilson said. “Lenders can manually underwrite those loans.”
Unfortunately, hardly any lenders are willing to manually underwrite a mortgage. That means most former short sellers remain locked out of the housing market.
“At the end of the day I decided not to pursue a home this year,” said Son, the father of two from New Jersey. “There’s nowhere I can go to get this issue solved except maybe hire a lawyer, and there’s no guarantee that they can fix it.”