Downside to Fannie-Freddie Short-Sale Bailout Program

Share Article men’s lifestyle and finance magazine remarks about the tremendously negative effect that short sales have on sellers’ credit, regardless of whether or not the seller is delinquent on his or her mortgage payment. men’s lifestyle and finance magazine today released their warning on the new Fannie Mae and Freddie Mac short-sale program for underwater mortgage borrowers, which is likely to result in negative marks against sellers’ credit rating—even if the seller is current on his or her mortgage payments.’s take on this could help borrowers identify a potential pitfall for their credit, and take steps to avoid such an outcome.

Kenneth R. Harney of the Los Angeles Times recently reported that Fannie Mae and Freddie Mac have teamed up to outline a new plan to approve short sales for mortgage borrowers who are underwater, but still current with their loan payments. Underwater mortgages arise when a home is valued at less than the balance of the loan that it took for the borrower to purchase it. The L.A. Times article states that currently, between both Fannie and Freddie, there are roughly 3.7 million borrowers who are making timely mortgage payments, but have underwater mortgages. Harney points out that typically, a short sale is associated with a major delinquency on the part of the borrower; hence FICO credit scores reprimand their credit scores with a huge hit. heeds consumers against anything that will cause major damage to their credit.’s Senior staff writer is quoted as saying, “Once a credit score has taken a hit, it could take years to build it back up. It’s scary how one event, mistake, or late payment can have such a profound effect on one’s score, and take such a long time to repair. I think in general people undervalue their credit, but it boils down to a number that represents how trustworthy of a borrower you are. A good score can save a ton of money and make life very easy when it’s needed, but a low one can potentially cost extra money in higher interest rates, and cause a headache for consumers who can’t get approved for loans. Handle your credit history with care, and be working constantly at it.”

Harney reports that the logical assumption for homeowners who are going through short sales via Fannie and Freddie’s new program, in other words homeowners who are current on their mortgage payments and have no delinquency on their accounts, would not be held to the same low standards as other short sellers. However the contrary appears to be true. Harney states in his article that the scoring system is not designed to be able to recognize which short sellers are current on their mortgages and which ones are delinquent. It ranks each short seller the same way, and provides a hit to the seller’s credit score either way. urges members of the Fair Isaac Corp., the developer of the FICO score, to revamp the system so that it can properly identify those sellers who do not deserve to take a credit hit.’s Senior staff writer is quoted as saying, “Don’t penalize the people who have been paying their home loans dutifully for months on end. Many people are at the short end of the stick since the housing bubble burst, and yes many people have fallen behind on payments. But the ones who have been scraping together enough dough each month to make timely payments ought not suffer the same credit hits as somebody whose account is delinquent. It’s hard for me to believe in this day and age, with all of our grandiose technology, that something can’t be done to the FICO model to enable it to recognize when a short seller has a current loan or not.”

The above-mentioned Los Angeles Times article states that according to statistical reviews done by FICO, in a sample of borrowers taken from 2007 to 2009, more than 55% of short sellers later defaulted on their credit accounts after the short sale was completed. FICO classifies them in the same risk class as borrowers whose houses have been foreclosed, consumers who have filed bankruptcy.

About lifestyle and finance magazine is an online men’s magazine known to feature articles about travel, lifestyle, and financial suggestions such as how to grow wealth by starting early. readers are generally men between the ages of 30 and 50 years old, that have achieved certain life goals, be they professional or personal goals, and are gearing up or headed towards a new aspiration. men’s lifestyle and finance magazine features stories on men’s luxury items, vacation ideas, hot chicks, and suggestions for the top online dating websites. is owned and operated by Purpose Inc.

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David Klein
Purpose Inc.
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