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When Marine Corps spouse Charla Williams’ husband got orders to Okinawa last summer, the couple did not want to go through a short sale on their Florida home, which was worth less than they paid for it in the depressed housing market there.
But they felt they had no choice; they just couldn’t afford to maintain two households.
In a short sale, a financial institution allows a homeowner to sell a property for less than its mortgage, without having to come up with the difference. That gets recorded on credit reports, so your credit score takes a hit — but it’s not as bad as going through a foreclosure.
Charla Williams said she and her husband were fully aware that a short sale would hurt their credit scores. At the time, her FICO score was 814 and her husband’s was 816, on a scale of 300 to 850. They had always scrupulously paid their bills on time, including their mortgage payments.
But their mortgage servicer, Bank of America, told them that in order to complete the short sale, their loan had to be at least 31 days delinquent. Williams contended otherwise, citing guidance issued in 2012 from the Consumer Financial Protection Bureau and regulators of banks and credit unions. Among other things, that guidance states mortgage servicers should not advise military homeowners with permanent change-of-station orders who are current on their payments to intentionally skip payments.
But they did what Bank of America wanted. And they found that not only did that create a hardship by delaying their closing, but also further damaged their credit scores. (Mortgage servicers are those who manage the administrative aspects of the mortgage, such as collecting payments. Sometimes, but not always, the mortgage service is also investor who provided the money for the loan.)
Bank of America officials told her they were required to report the “delinquency” to credit bureaus, she said. Subsequently, both their credit scores dipped to 667 — a drop of 147 for her and 149 for her husband.
“We entered the short sale process knowing that a short sale would have an effect on our credit,” she said. “But the missed payment was almost as damaging, so we ended up with a double whammy on our credit score.”
She complained to Bank of America and to the CFPB, and the “missed payment” notification was removed from their credit reports late last year. Once that happened, her score rebounded by 53 points to 720 as of March 31; her husband’s had improved by 41 points, to 708.
Williams is pressing the issue because she doesn’t want this to happen to other military families — and she still contends that she and her husband should not have been forced to intentionally miss a payment in the first place.
But whether that happens actually hinges on the investor who provided the money for the mortgage and the wording of the mortgage contract, Military Times research shows.
Bank of America spokeswoman Jumana Bauwens said BoA “complied with the guidance of not instructing a borrower to default to qualify for loss mitigation. In this instance, the borrower was seeking assistance that was only available to a delinquent borrower,” because of the particular investor and the particular contract on Williams’ home.
The guidance from CFPB and regulators about military homeowners who are PCSing states: “Providing accurate, factual information to a homeowner about available loss mitigation programs for delinquent homeowners is not a practice that raises this concern,” referring to concerns about practices that may pose risks to homeowners.
In other words, sometimes the mortgage servicer can get stuck between the proverbial rock and hard place.
A Treasury Department official acknowledged that in addition to following regulators’ guidelines, mortgage servicers have to follow their investors’ requirements that are set in contracts. And indeed, the official said, “There may be some cases where investors require a borrower to be delinquent” prior to offering a short sale.
The Treasury and Housing and Urban Development departments administer the Home Affordable Foreclosure Alternatives program, which provides options to help homeowners who can’t afford their mortgages. There are varying rules, but the guidance also applies to military homeowners who cite PCS orders as a hardship when seeking help.
Williams said she and her husband didn’t qualify for the HAFA program or other assistance. Their loan was under the Agriculture Department’s Rural Development Housing program — and that program’s guidelines do, in fact, require homeowners to be delinquent on their loans to qualify for a short sale.
“Common sense should play a factor in this situation,” she said. “The ones issuing the military guidelines and the one backing our loan were government agencies.”
Homeowners with questions and concerns can call the Homeowner’s HOPE Hotline, 888-995-HOPE (4673), and speak to HUD-approved housing counselors who can help navigate the process. Counselors can work with mortgage servicers and investors to help the borrower find answers to questions such as whether he or she would have to be delinquent on a loan in order to qualify for the short sale or other programs. Homeowners with complaints can contact the Consumer Financial Protection Bureau.