Section 1.28 - Short Sale and Restructured Mortgage Loans

Section 1.28 - Short Sale and Restructured Mortgage Loans

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 1 of 14 Correspondent Seller Guide Broker Seller Guide Section 1.28 - Short Sale and Restructured Mortgage Loans In This Section This section contains the following topics. Overview . . 2 Related Bulletins . . 2 Borrowers with a Short Sale in Credit History . . 3 Short Sales - General . . 3 Short Sales – Agency Loan Programs . . 4 Short Sales –VA Loan Programs . . 7 Short Sales – Non-Agency Loan Programs . . 7 Borrowers Buying a Short Sale Property . . 8 Agency Loan Programs . . 8 Non-Agency Loan Programs . . 9 Documentation Requirements .

. 10 Potential Red Flags . . 11 Borrowers with a Restructured Mortgage Loan in Credit History . . 13 Non-AUS Loan Requirements . . 13 Fannie Mae DU . . 14 Freddie Mac LP . . 14 VA Credit Requirements . . 14

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 2 of 14 Correspondent Seller Guide Broker Seller Guide Overview General The requirements outlined in this document apply to any new application for the scenarios outlined below:  a borrower who has a short sale or restructured mortgage in their credit history, and/or  a borrower buying a short sale property, as reflected in their sales contract. Notes:  The short sale guidelines apply to all occupancy types and all SunTrust (traditionally underwritten and AUS processed) loan programs to include conforming and non-conforming loan amounts.

 The restructured mortgage loan guidelines apply to all occupancy types and all SunTrust (traditionally underwritten and AUS processed) loan programs, to include conforming and non-conforming loan amounts.  For loan programs with existing published short sale or restructured mortgage loan guidelines, the more restrictive of the loan program guidelines or those outlined in this section should be followed. Related Bulletins General Related bulletins are provided below in PDF format. To view the list of published bulletins, select the applicable year below.

 2015  2014  2013  2012  2011  2010  2009

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 3 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Short Sale in Credit History Short Sales - General  A short sale, sometimes referred to as a short payoff or a preforeclosure sale, is defined as a transaction wherein a mortgage lender agrees to accept a lesser amount than is currently owed to satisfy an existing mortgage.  Indicators that may be disclosed that would identify a short sale include, but are not limited to:  a 1099-C from the mortgage lender, mortgage insurance company or third party investor,  the borrower’s credit report indicates wording such as, “Settled for less than amount owed,” or “PIF” (Paid In Full) - not as agree, or  the borrower’s credit report indicates Remarks Codes associated with the credit report tradeline of E0047, R0107, or T0140.

 Once a short sale is completed, the loan balance is charged off.  Depending on state law or the mortgage legal documents, the lender or the investor may have a right to file a deficiency judgment after the completion of the short sale, to collect the losses incurred. Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 4 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Short Sale in Credit History, Continued Short Sales – Agency Loan Programs  The short sale Agency guidelines apply to the following loan programs:  Agency,  Agency Plus, and  Texas Cash-Out Refinance.

Non-AUS  The waiting period begins on the completion date (date short sale is executed) and ends on the disbursement date of the new loan.  Short sales must be completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when documentation is obtained that the borrower had an extenuating circumstance and all other short sale guidelines are met.

 Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.  If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include  documents that confirm the event such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.; and  documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.

 The lender must obtain a written explanation from the borrower explaining the relevance of the documentation. The written explanation must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate that the borrower had no reasonable options other than to default on his or her financial obligations. The written explanation may be in the form of a letter from the borrower, an email from the borrower, or some other form of written documentation provided by the borrower.

 After a short sale the borrower’s credit will be considered re-established if all of the following are met:  The waiting period requirements are met.

 The borrower meets all other credit requirements outlined in the product guidelines.  The borrower has traditional credit. Non-traditional credit or “thin files” are not acceptable.  If there is evidence of a deficiency judgment by the lender, mortgage insurance company or investor against the borrower for the charged-off amount and there is a secured or unsecured promissory note for the deficiency balance, the payment must be included in the debt ratio calculation.

Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 5 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Short Sale in Credit History, Continued Short Sales – Agency Loan Programs, (continued) Fannie Mae DU Non-AUS guidelines apply except as follows:  The borrower’s credit will be considered re-established if all of the following are met:  The waiting period requirements are met.  The loan receives an “Approve/ Eligible” recommendation from DU.  The borrower meets all other credit requirements outlined in the product guidelines.

 When there is conflicting or inaccurate information provided on a short sale credit report tradeline, the underwriter may instruct DU to disregard the conflicting or inaccurate information. Click here for DU instructions.

Freddie Mac LP  The waiting period begins on the completion date (date short sale is executed) and ends on the application date of the new loan.  The following combined time elapse since a short sale and LTV/TLTV/HTLTV guidelines apply.  If the short sale was due to financial mismanagement, four (4) years but less than seven (7) years, the maximum LTV/TLTV/HTLTV is the lesser of 90% or the maximum LTV/TLTV/HTLTV per the transaction type. For seven (7) years or greater, then the maximum LTV/TLTV/HTLTV is per product guidelines.

 If the short sale was due to extenuating circumstances, two (2) years but less than seven (7) years, the maximum LTV/TLTV/HTLTV is the lesser of 90% or the maximum LTV/TLTV/HTLTV per the transaction type.

For seven (7) years or greater, then the maximum LTV/TLTV/HTLTV is per product guidelines.  The following additional requirements apply for both financial mismanagement and extenuating circumstance causes:  The purchase of a primary residence is permitted.  Limited cash-out refinance transactions are permitted for all occupancy types.  The purchase of a second home or investment property is not permitted.  Cash-out refinance transactions (all occupancy types) are not permitted.  If financial mismanagement contributed to the borrower’s financial hardship causing a short sale to occur, the file must contain all of the following documentation:  An underwriting analysis on Form 1077, Uniform Underwriting and Transmittal Summary, or on a separate document in the loan file, relating the borrower's explanation to the loan file documentation and leading to a reasonable conclusion that the financial mismanagement is unlikely to recur and the borrower's credit reputation is acceptable.

 The borrower has reestablished an acceptable credit reputation. The borrower’s credit will be considered re-established if all of the following requirements are met:  The waiting period and the related LTV and occupancy requirements are met.  The loan receives an “Accept/Eligible” recommendation from LP.  The borrower meets all other credit requirements outlined in the product guidelines. Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 6 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Short Sale in Credit History, Continued Short Sales – Agency Loan Programs, (continued)  Evidence on the credit report and other credit documentation in the loan file of the length of time since completion of the short sale to the date of the application, and of completion of the waiting period requirements outlined above.

 If extenuating circumstances contributed to the borrower’s financial hardship causing a short sale to occur, the file must contain all of the following documentation:  A written statement from the borrower attributing the cause of the financial difficulties to outside factors beyond the borrower's control that are not ongoing and are unlikely to recur.

 Third-party documentation confirming that the events related by the borrower in the explanation were an isolated occurrence and significantly reduced the borrower's income and/or increased expenses and rendered the borrower unable to repay as agreed.  An underwriting analysis on Form 1077, Uniform Underwriting and Transmittal Summary, or on a separate document in the loan file, relating the borrower's explanation to the loan file documentation and leading to a reasonable conclusion that:  The events causing the financial difficulties were beyond the borrower's control, are not ongoing and are unlikely to recur; and  The borrower has reestablished an acceptable credit reputation.

The borrower’s credit will be considered re-established if all of the following requirements are met:  The waiting period and the related LTV and occupancy requirements are met.

 The loan receives an “Accept/Eligible” recommendation from LP.  The borrower meets all other credit requirements outlined in the product guidelines.  Evidence on the credit report and other documentation in the Mortgage file of the length of time since completion of the short sale to the date of application and of completion of the waiting period requirements outlined above.  If not clearly identified on the credit report, the borrower must provide a complete copy of the short sale documents to establish the completion date of the short sale. Note: LP may not, in all instances, be able to identify a short sale in the credit report data.

As a result, the above referenced short sale guidelines may have to be evaluated outside of LP.

Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 7 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Short Sale in Credit History, Continued Short Sales – VA Loan Programs  For loan programs with existing published short sale guidelines, the more restrictive of the loan program short sale guidelines or those outlined below should be followed:  A minimum, of two (2) years must have elapsed since the short sale occurred and all of the following re-established credit guidelines must be met:  A minimum of three (3) credit references (one must be a traditional credit reference and one must be housing related),  No more than two (2) 30 day late payments in the 24 months preceding the loan application,  No late payments on housing debt since completion of short sale, and  No new public records for bankruptcies, foreclosures, deeds-in-lieu, unpaid judgments, unpaid collections, garnishments, liens, etc.

since completion of short sale.

 If there is evidence of a deficiency judgment by the lender, mortgage insurance company or investor against the borrower for the charged-off amount and there is a secured or unsecured promissory note for the deficiency balance, the payment must be included in the debt ratio calculation. Note: Non-traditional credit history is not allowed. Short Sales – Non-Agency Loan Programs  The short sale non-Agency guidelines below apply to the Key Loan Program.  A minimum, of five (5) years must have elapsed since the short sale occurred and all of the following re-established credit guidelines must be met:  A minimum of three (3) credit references (one must be a traditional credit reference and one must be housing related),  No more than two (2) 30 day late payments in the 24 months preceding the loan application,  No late payments on housing debt since completion of short sale, and  No new public records for bankruptcies, foreclosures, deeds-in-lieu, unpaid judgments, unpaid collections, garnishments, liens, etc.

since completion of short sale.

 If there is evidence of a deficiency judgment by the lender, mortgage insurance company or investor against the borrower for the charged-off amount and there is a secured or unsecured promissory note for the deficiency balance, the payment must be included in the debt ratio calculation. Note: Non-traditional credit history is not allowed.

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 8 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers Buying a Short Sale Property Agency Loan Programs  Borrowers may pay additional fees, assessments, or payments in connection with acquiring (a property that is a pre-foreclosure or short sale that are typically the responsibility of the seller or another party.

Examples of additional fees, assessments, or payments include, but are not limited to, the following:  short sale processing fees (also referred to as short sale negotiation fees, buyer discount fees, short sale buyer fees); Note: This fee does not represent a common and customary charge and therefore must be treated as a sales concession if any portion is reimbursed by an interested party to the transaction.

 payment to a subordinate lienholder; and  payment of delinquent taxes or delinquent HOA assessments.  The following requirements apply:  The borrower (buyer) must be provided with written details of the additional fees, assessments, or payments and the additional necessary funds to complete the transaction must be documented.  The servicer that is agreeing to the pre-foreclosure or short sale must be provided with written details of the fees, assessments, or payments and has the option of renegotiating the payoff amount to release its lien.  All parties (buyer, seller, and servicer) must provide their written agreement of the final details of the transaction which must include the additional fees, assessments, or payments.

This can be accomplished by using the “Request for Approval of Short Sale” or “Alternative Request for the Approval of Short Sale” forms published by the U.S. Treasury Supplemental Directive 09–09 or any alternative form or addendum.

 SunTrust further defines acceptable documentation of the final details of the transaction to be, but not limited to:  Fully executed final approval of short sale from seller’s lender,  contract addendum modifying the fees and/or purchase price based upon the final approved short sale (this can be obtained from seller and/or seller’s lender who is being paid off)  The Settlement Statement must include all fees, assessments, and payments included in the transaction.  The transaction must be an arm’s length transaction (i.e., all parties are unaffiliated and unrelated).

 Correspondent Lenders must diligently review these purchase transactions for unusual fees, payments, and other possible red flags that could indicate fraudulent activity related to the short sale.

Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 9 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers Buying a Short Sale Property, Continued Non-Agency Loan Programs  Borrowers may pay additional fees and payments in connection with purchasing a short sale property that are typically the responsibility of the seller. Examples of short sale fees and payments include, but are not limited to, the following:  short sale processing fee (i.e., short sale negotiation fees, buyer discount fees, short sale buyer fees), Note: The short sale processing fee is not a common and customary charge and must be treated as a sales concession if any portion is reimbursed by an interested party to the transaction.

 negotiated short payoff to a subordinate lien holder, and  payment of delinquent taxes or delinquent homeowner association (HOA) dues. Note: The above referenced fees are non-loan estimate fees.  These fees and payments cannot be financed into the loan amount and must be included on the Settlement statement. Borrowers must fund the cost of the additional fees and payments with their own funds. The additional funds to complete the transaction must be documented.  The sales contract will identify if the property being purchased is a short sale property.

 The transaction must be an arm’s length transaction (i.e., all parties are unaffiliated and unrelated).

Reference: See the Documentation Requirements subtopic subsequently presented in this topic for additional information.  Purchase transactions where SunTrust Mortgage or another lender is the servicer, who is agreeing to the short sale, are eligible provided the transaction meets the guidelines outlined in this document.  Correspondent Lenders must diligently review these purchase transactions for unusual fees, payments, and other possible red flags that could indicate fraudulent activity related to the short sale.

Reference: See the Potential Red Flags subtopic subsequently presented in this topic for additional information. Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 10 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers Buying a Short Sale Property, Continued Documentation Requirements Agency Loan Programs Non-Agency and VA Loan Programs The following documentation must be included in the loan file:  full appraisal based on an interior/exterior inspection of the subject property or a Fannie Mae Property Inspection Waiver (PIW),  Note: Fannie Mae’s Property Fieldwork Waiver (PFW), and automated valuation models (AVMs) are not eligible.

 the sales contract executed by all parties with details of the additional fees and payments,  the Settlement Statement that includes all borrower paid short sale fees and payments, and  source of client’s funds used to cover the short sale fees and payments. The following documentation must be included in the loan file:  full appraisal based on an interior/exterior inspection of the subject property, Note: Reduced appraisals, Freddie Mac Form 2055, Fannie Mae’s Property Inspection Waiver (PIW), Fannie Mae’s Property Fieldwork Waiver (PFW), and automated valuation models (AVMs) are not eligible.

 the sales contract executed by all parties with details of the additional fees and payments,  a copy of the executed arm’s length affidavit(s) verifying all parties (borrower, seller, Listing and Buying Agents) are unaffiliated and unrelated,  the Settlement Statement that includes all borrower paid short sale fees and payments, and  source of client’s funds used to cover the short sale fees and payments.

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 11 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers Buying a Short Sale Property, Continued Potential Red Flags Outlined below are examples of possible red flags associated with properties purchased through a short sale transaction.

If . Possible Red Flag Then . Borrower’s offer to purchase the subject property is within 72 hours of the property being listed at a short sale price. Possible indicator that the borrower and offer were pre- arranged prior to the property being listed at the short sale price.

When validating the appraisal:  Ensure the property is listed within the market range.  Compare the purchase offer date against the days on market (DOM) information in Subject section of the appraisal.  Confirm borrower is not in the real estate industry.  Confirm transaction is an arm’s length transaction. Borrower is related or associated with the seller or listing agent. If association exists:  There is an increased risk for straw buyer.  The family member that currently owns the home continues to write checks to the lender.  Review credit documents for similar last names, addresses, phone numbers, employers, etc.

 If review identifies loan is a straw buyer, loan is not eligible. Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 12 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers Buying a Short Sale Property, Continued Potential Red Flags, (continued) If . Possible Red Flag Then . Borrower is a real estate professional (realtor, investor, etc.). Increased risk of:  Straw Buyer,  Foreclosure,  Bail out, or  Occupancy misrepresentation  Review credit documents for any evidence of borrower being a real estate professional.

 If borrower is a real estate professional, must obtain two years tax transcripts.  If misrepresentation exists, loan is not eligible.

Borrower’s assets have accumulated rapidly and recently. Possible straw buyer  Request explanation for unusual bank statement activity.  Document source of large deposits. Borrower lives in different state than subject property Many short sale/foreclosure bailout schemes recruit out- of-state investors. High risk of:  Straw Buyer,  Foreclosure,  Bail out, or  Occupancy misrepresentation  Ensure property is on MLS listing.  Obtain letter of explanation from borrower as to how they found the property.  Confirm transaction is an arm’s length transaction.

 If misrepresentation exists, loan is not eligible.

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 13 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Restructured Mortgage Loan in Credit History Non-AUS Loan Requirements  A restructured mortgage loan is sometimes referred to as a “short pay loan” or “short pay refinance” and is defined as a mortgage loan in which the terms of the original transaction have been changed resulting in either absolute forgiveness of the debt or a restructure of the debt through either a modification of the original loan or origination of a new loan that results in:  forgiveness of a portion of principal and/or interest on either the first or second mortgage,  application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness,  conversion of any portion of the original mortgage debt from secured to unsecured, or  conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage.

Notes:  A “soft” subordinate mortgage is defined as a mortgage that is fully forgiven over a period of time or due upon the sale of the subject property.  Typically there are no regularly scheduled payments required for a “soft” subordinate mortgage.  If the transaction involves refinancing of an outside lender’s mortgage that has previously been restructured, as defined above, the mortgage is NOT ELIGIBLE for refinancing with SunTrust Mortgage.  If the transaction involves the refinancing of a SunTrust mortgage that has previously been restructured or is currently being processed or serviced by the SunTrust Loss Mitigation Group, the refinance is eligible to proceed provided that transaction meets the following specific loan program guidelines:  borrower must have made at least 24 consecutive months of payments on the restructured loan to be eligible for refinancing, and  borrower‘s payment history must reflect 0x30 in the most recent 24 months.

 Cash-out refinance transactions are not eligible if the existing mortgage is a restructured mortgage.

 Indicators that may be disclosed that would identify a prior restructure of a mortgage include, but are not limited to:  tax returns that indicate income from a 1099C from the mortgage lender, mortgage insurance company or third party investor,  loan payoff amount is significantly less than the credit report balance or the current monthly payment disclosed on the 1003 varies from the payment reported on the credit report, or  the borrower’s credit report indicates wording such as, “Settled for less than amount owed,” or “PIF” (Paid In Full) - not as agreed. Continued on next page

Section 1.28 October 2, 2015 Short Sale and Restructured Mortgage Loans Page 14 of 14 Correspondent Seller Guide Broker Seller Guide Borrowers with a Restructured Mortgage Loan in Credit History, Continued Fannie Mae DU Not eligible, except on DU Refi Plus™ transactions, which do not need to meet any of the requirements outlined in this section.

Freddie Mac LP Not eligible. VA Credit Requirements  A restructured mortgage loan is defined as a mortgage loan in which the terms of the original transaction have been changed resulting in a restructure of debt through a modification of the original loan that results in new loan terms.  If the transaction involves refinancing of any lender’s mortgage that has previously been restructured including with a reduction in principal, forgiveness of debt, or created a soft second mortgage is eligible for refinancing with SunTrust Mortgage.  The borrower must be 0 x 30 days late in the last 12 months under the restructured loan agreement.