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FM Commentary

Desktop Underwriter Clarification: How DU Identifies and Underwrites a Previous Foreclosure or Preforeclosure Sale

Stephen Pawlowski

Fannie Mae is updating our automated underwriting system, Desktop Underwriter® (DU®), in November so lenders have greater flexibility in underwriting and approving borrowers with a previous preforeclosure sale or short sale. Beginning November 16th, DU will include an option that allows lenders to instruct the system to disregard foreclosure information received on a credit report if there is also a preforeclosure sale noted on the same account or trade line. This change is designed to assist lenders and borrowers in managing inconsistent, incomplete, and conflicting data that appears on the borrower's credit report.

When a borrower is seriously delinquent, has a pending foreclosure, or has completed a preforeclosure sale, the mortgage servicer reports these events to the credit bureaus and the events appear on the borrower's credit report. A foreclosure on the credit report has an associated disposition date, but there is no specific date on the credit report that indicates when a preforeclosure sale occurred. For borrowers who have reached a preforeclosure sale agreement with their servicer, the credit report can and often does reflect both a foreclosure and preforeclosure sale event. Unfortunately, it is not possible to determine if the preforeclosure sale was reported before or after the foreclosure was reported. This conflicting information can create significant roadblocks for the borrower.

Our guidelines require a two-year waiting period following a preforeclosure sale and a seven-year waiting period following a foreclosure before the borrower may obtain a new mortgage. Many borrowers who agreed to a preforeclosure sale between the last two and seven years are re-entering the market only to find that their credit report trade line includes both a foreclosure and a preforeclosure sale.

Today, in the case where both a foreclosure and preforeclosure sale are reported on the same account, DU applies the more conservative underwriting guidelines and the seven-year waiting period requirement. Lenders always have been encouraged to confirm if the foreclosure was actually a preforeclosure sale, and if so, manually apply the two-year waiting period. However, many lenders are reluctant to manually underwrite mortgage loans. Starting November 16, DU will offer lenders the ability to instruct DU to disregard the foreclosure information after validating the preforeclosure sale with the borrower. By making this change to DU in November, lenders will have the opportunity to get a DU recommendation based on actual foreclosure/preforeclosure credit history and with the appropriate waiting period applied.

Stephen Pawlowski
Senior Vice President for Business Solution Initiatives, Single-Family Mortgage Business

October 4, 2013

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