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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127815  
Subject: Re: Freddie Mac Bets AGAINST American Homeowners Date: 2/4/2013 10:17 PM
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While I think there is more to the story than Freddie Mac 'betting against homeowners' (it's called hedging your bets, since they are also providing a very significant amount of betting FOR homeowners by supplying the financing for what, 40% - 50% of the loans currently being made?), if the authors of the story had chosen a better 'victim' I might have had more sympathy.

The couple highlighted as being unable to refinance because of 'rules set by Freddie' did most of the victimizing to themselves, rather than being victimized BY those rules, IMO:

The Silversteins have a 30-year fixed mortgage with an interest rate of 6.875 percent, much higher than the going rate of less than 4 percent. They have borrowed from family members and are living paycheck to paycheck. If they could refinance, they would save about $500 a month. He says the extra money would help them pay back some of their family members and visit their grandchildren more often.

But brokers have told the Silversteins that they cannot refinance, thanks to a Freddie Mac rule.

The Silversteins used to live in a larger house 15 minutes from their current place, in a more upscale development. They had always planned to downsize as they approached retirement. In 2005, they made the mistake of buying their new house before selling the larger one. As the housing market plummeted, they couldn’t sell their old house, so they carried two mortgages for 2½ years, wiping out their savings and 401(k). “It just drained us,” Jay Silverstein says.

Finally, they were advised to try a short sale, in which the house is sold for less than the value of the underlying mortgage. They stopped making payments on the big house for it to go through. The sale was finally completed in 2009.

Such debacles hurt a borrower’s credit rating. But Bonnie has a solid job at a doctor’s office, and Jay has a pension from working for more than two decades for Johnson & Johnson. They say they haven’t missed a payment on their current mortgage.

But the Silversteins haven't been able to get their refi. Freddie Mac won’t insure a new loan for people who had a short sale in the last two to four years, depending on their financial condition. While the company’s previous rules prohibited some short sales, in October 2010 the company changed its criteria to include all short sales. It is unclear whether the Silverstein mortgage would have been barred from a short sale under the previous Freddie rules.
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“We’re in financial jail,” says Jay, “and we’ve never been there before.”


So, as they 'approached retirement', they bought their retirement home without selling their 'upscale' home, and without having financial resources to be able to make both mortgage payments without having to raid their 401(k)s and borrow from family/friends. Since purchasing the 2nd home, he apparently retired, since 'Jay has a pension from working for more than two decades for Johnson & Johnson', further degrading their ability to pay for their home, so that now they feel like they are in 'financial jail'.

If they are in 'financial jail', it's one they put themselves in. Anyone who buys a 2nd home without having a solid plan to pay for all the debt (including, but not limited to - pricing the house aggressively, dropping the price aggressively if it's not selling, having money to bring to the table if necessary to sell the house, remaining employed instead of retiring or getting another job after retirement) needs to recognize that their decisions have consequences - in this case, they cannot refi until enough time has passed after the short sale (anywhere from 2 - 4 years, according to the article).

While the current, more restrictive, rules on borrowing after a short sale we not in place when the short sale in this case occurred, it is still likely that this couple would have qualified to borrow shortly after the short sale even under the old rules, as they were delinquent on the payments on their short sale home at the time of the sale. If they had been able to do so, they had at least 9 months in 2010 when they could have done so before the new rules went in place. And, in an attempt to show additional victimization, you can bet that the article would have trumpeted that the couple would have qualified under the old rules if it had been able to. Instead, it says "it is unclear" whether they would have qualified under the old rules.

And guess what? Their parole from jail is almost here. Enough time has passed since their short sale in 2009 (4 years ago) that they should be able to qualify for a new conventional mortgage sometime this year, if their credit scores will support it. (Possibly, more of those consequences from the actions they took.)

AJ
- has purchased houses before having sold the previous house 5 times, and, as a consequence, carried mortgages on 2 homes for anywhere from 20 days to 3 1/2 years, but has never had to do a short sale, miss a payment or dig into a 401(k) to make any mortgage payments
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