- Filed Under
These mandatory short sales and deficiency waivers are a part of a much larger settlement with these five banks, and only these five banks. To be eligible:
The mortgage must be owned by Bank of America, JPMorgan Chase, Wells Fargo, Citigroup or Ally Financial.
Troops must be on full-time active duty.
The property must be a principal residence or must have been so at least until the family moved on permanent change-of-station orders.
The property must have been purchased between July 1, 2006, and Dec. 31, 2008.
PCS orders must have been received on or after Oct. 1, 2010, and must require relocation outside a 50-mile radius.
The short sale must take place within 12 months of relocation.
A Marine officer wants to know: If he accepts help from his bank under the national mortgage settlement reached in March, how will it affect his credit record — and possibly his security clearance?
Under that settlement with the Justice Department and 49 state attorneys general, the five largest mortgage servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — must provide mandatory short sale agreements and deficiency waivers to certain troops forced to sell their homes at a loss because of permanent change-of-station moves.
This means that when the service member sells the house for less than the remaining balance on the mortgage, the bank won't later try to collect the difference for amounts less than $250,000.
For example, if your outstanding mortgage balance is $200,000 and you sell your house for $150,000, the bank can't later try to collect the other $50,000.
"But how does the lender report it to the credit bureau? Is there language or an expectation that it will not negatively impact the credit report?" wondered the officer, who asked to remain anonymous.
The settlement addresses the question only generally, requiring that the "servicer shall not make inaccurate reports to credit reporting agencies when a service member, who has not defaulted before relocating under military orders to a new duty station, obtains a short sale, loan modification, or other loss mitigation relief."
We asked the banks and other experts to be more specific:
How do the banks report these specific short sales and deficiency waivers to the credit bureaus?
• Citi: "We would report the loan as settled for less than the full balance," said spokesman Mark Rodgers.
• Wells Fargo: "For a short sale, [Wells Fargo] reports an accounts status of 13 (paid or closed account/zero balance), along with the special comment code AU (account paid in full for less than full balance)," said spokeswoman Veronica Clemons.
Chase, Bank of America, and Ally Financial did not respond.
How does this wording in the reporting of a short sale affect your credit score?
It can have a negative impact on your FICO score, said Anthony Sprauve, spokesman for myFICO. FICO is the most common credit score, which is a compilation and scoring based on information from the credit reporting bureaus.
"Any codes that indicate something along the lines of ‘paid in full for less than the full balance' is classified as a derogatory indicator and can have a negative impact on one's score," he said.
According to Experian's VantageScore credit scoring system, someone with "clean" credit would see their score drop by 120 to 130 points for a short sale.
How does that translate to reviews of credit reports for security clearances?
There is no definitive answer, based on information provided by the service branches. The services review credit reports during the initial investigation into a person's clearance as well as when clearances are renewed or upgraded.
"The existence of a short sale on a credit report is handled on a case-by-case basis," said Air Force Capt. Maren Barney.
"A bankruptcy or short sale is not a ‘bad' indicator by itself. For example, if a subject has never had financial problems in the past, yet was forced into foreclosure or short sale due to housing downturn and inability to sell home forced by a [PCS move], this could be mitigated," Barney said.
However, if the member has a history of not meeting financial obligations and undergoes a foreclosure or short sale, that could constitute a pattern of financial irresponsibility.
Army officials did not address how short sales, or the language reported to the credit bureaus, affect security clearances.
Navy officials did not respond.