Sen. Bill Nelson wants regulators to fix a "disturbing" credit-reporting quirk that is torching the credit of people who sold their homes in short sales.
The sales, in which people sell their homes for less than they owe in loans, are often coded as foreclosures on credit reports, scarring many seeking to repair their finances with a credit-score "kiss of death."
In a letter last week to federal regulators, Nelson cited a Times report on the problem and urged penalties for the mortgage and credit industries if a fix was not in the works within 90 days.
Speaking before a U.S. Senate subcommittee, the Florida Democrat called short sales and foreclosures "a completely different breed of horse."
Lumping the two together, he said, punished short sellers who had sought a bank-approved method to leave mortgages they no longer wanted or were unable to pay. "You're supposed to be protecting the consumer," Nelson said. "I would appreciate it if you all would stop this nonsense and get it coded correctly so that our people are not being penalized."
The lack of a distinct code became a big issue after the housing bust, when once-rare short sales flooded the market. Tampa Bay saw seven short sales in 2003 but more than 7,000 last year, sales listing data show, and short sales accounted for nearly a quarter of all agents' local sales last year.
Four out of 10 Florida mortgages are "underwater," meaning homeowners owe more than their home is worth, CoreLogic data show. Nearly 45 percent of Tampa Bay home loans are underwater, one of the highest rates in the nation.
No one tracks how many short sales have been falsely reported. But fixing the error, credit experts said, can be an arduous chore that takes months, if not years, and offers little guarantee.
The miscue can worsen a homeowner's chances to qualify for or obtain a good rate on everything from credit cards to car loans, and can delay them from getting a new mortgage for years.
Consumer Financial Protection Bureau assistant director Corey Stone laid blame for the lack of a distinct code on short sales being "a relatively new phenomenon." Foreclosures and short sales "should be clearly distinguished in credit reports," he said, adding that regulators were looking into a fix.
But advocates said banks, credit bureaus and underwriting systems pass around blame for who's responsible.
"It should not be this difficult for us to figure out why this is happening," Trinity mortgage broker Pam Marron said. "This needed to be fixed, like, two weeks ago."
Consumer Data Industry Association CEO Stuart Pratt said his firm, which developed the credit industry's standard reporting system, "probably will have to create a short-sale code" as mortgage giants such as Fannie Mae seek more detailed histories on homeowners.
Lenders who don't code short sales as foreclosures, Pratt said, often label them as loans "settled for less than the full amount." Short sales still drag down credit scores, a precaution lenders argue is crucial to help protect against bad loans.
Nelson's letter to the heads of the Federal Trade Commission and the Consumer Financial Protection Bureau called for a "complete and thorough investigation" of the credit-reporting practice. Nelson's press secretary said the senator had yet to receive a response but planned to meet with regulators this week.
At the subcommittee meeting, Nelson relayed his own credit woes, telling how his attempt to refinance a home was stalled when he found someone bought a refrigerator in Wisconsin under his name and failed to make the payments. After much haranguing, Nelson said, he was able to remove the stain from his credit, only to see it return a year later.
"If this is happening to me," he said, "what is it doing to the average citizen out on the street who doesn't know how to go about straightening out something like this?"
Drew Harwell can be reached at [email protected] or (727) 893-8252.