Elizabeth. Thanks for all of the good information. Royal...

Thanks for the information it used to show up as a settled debt. With a zero balance.

Elizabeth, I have heard about this damage too. Short selling hurting you up to five years vs. seven on foreclosure.

Hi Gary: My sources say it doesn't matter if it's a short sale or a foreclosure. Both prevent you from buying another home in five years under Fannie Mae (without extentuating circumstances). There is no break for a short sale. You might be thinking it stays on your credit report for seven years. But it actually stays on your credit report for 10 years. People think "seven," because you you can file BK every seven years (or perhaps it's six and a half). Been a while since I looked at BK laws, and I know they have changed.

Hi Michelle: I believe at one point it was a pre-foreclosure redeemed. But it doesn't matter now.

Hi Royal: What a nice name. Thanks for stopping by.

Elizabeth, Thanks for sharing this info.  I know very little about short sales.  I'll add this to that knowledge.  ;)

What amazes me is how often folks will open their trap without having the slightest bit of information about what the subject they're talking about.... yet we see it all the time.

Thank you for this Elizabeth.

Great thoughts to consider, and right on target, Elizabeth. Hope your weekend's off to a fine start in beautiful, sunny Cal State.

Elizabeth....any form of not paying your debt will ruin your credit - or at least tarnish it for a long while. Especially when it comes to paying your mortgage. ;-)  Many feel one form of turning over your home to the lender is better than another....many of the Realtors working with REO or Short Sales are not knowledgable in that area...unfortunately. ;-)

Well, Bob, maybe you're one of the lucky ones who won't ever have to be involved in a short sale. For your sake, I hope you are spared.

Hi Jesse, you're telling me. The problem is many people don't stop to think about what they are saying. They hear somebody else make a stupid remark, and so they repeat it.

Thanks for coming by, Pat.

Hi Teri: When we're signing loan docs, the escrow officer quickly moves through the documents, especially the trust deed clause about the late payment. I turn to my clients at that point to say, "And you will never be late, never, right?" And I explain what happens. Because some people think paying a late charge means it doesn't affect their credit.

I think it is important to point out that conforming products will not work for these clients.  But there are local banks and other portfolio lenders who will do these loan sooner for short sale clients.  They will have to provide full documentation of course! They will also need to put a minimum 20% down and their interest rate will be higher.  There also needs to be an explanation for the short sale. It is my opinion that the short sale does save the clients credit.  At the very minimum they are preventing additional mortgage lates because they can close out the transaction sooner.  Erin

Who are you talking about Erin? I am confused. The home owners or the buyers? If it's the buyers, they can get a conforming loan all day long.

No the seller.  I have co-workers who are closing loans for folks soon after the short sale.

Hi Elizabeth,

I knew that short sales were bad, but I heard that they weren't as bad as foreclosure.

Thanks for the info.

All the best!

Holy crap, Erin, give me a "for instance," because this sounds totally impossible. Have you closed such a deal? Or is this heresay? Or are they processing loan docs at rip-off (hard money) rates before the lender has had a chance to report the foreclosure?

Sometimes no matter how bad it may be, they will do it anyway just because of the bad situation, or at least perceived bad situation.  To worry about credit score is the least of their worries.

A lot of people are getting hit with trying to do a short sale or a foreclosure.  I would think the short sales route is better than giving the house back to the bank.  Is that correct?

Hi Elizabeth!  Nothing shady happening and these are not hard money deals. I know of one done at a national bank and one was local credit union.  All clients had to put a big chunk down.  What I am finding is often times the lenders are not reporting these short sales to the credit report and reflect paid as agreed with the late pays reflected. As you posted the borrower will still need to check yes on the "short sale box" on the loan application.  

I will do some investigation from those in my company who have closed these deals and I will call the bank's account reps and post 1st hand info on Monday :) My understanding is the short sale reflects on a person's credit as a paid collection.  But a foreclosure shows as a judgment which takes more off the FICO score.  I understand that a short sale will roughly affect FICO by 150 points and a foreclosure is 250. This ballpark figure was given to me by a national credit repair company.

Hi Erin: I believe the point-drop spread you quote came from an article I published two years ago. It is no longer accurate nor true.

Today, short sales and foreclosure both are reported as a Credit Factor Code #22 -- identical, say two independent mortgage sources with decades of experience and a real estate lawyer.

But I suppose banks aren't fast enough on the trigger to report a short sale before a new purchase can be closed, and those loans aren't Fannie Mae. Because Fannie Mae will require 3 years with extenuating circumstances, 5 without, regardless of down payment.

Also, there is no short sale box but there is a foreclosure box.

And last, I would no more put my faith in what a "national credit repair company" has to say than I would that guy flashing gold watches inside his jacket down on 5th and Broadway. :)

Elizabeth, good post about the effects on credit. I have heard from some lenders that they can still get a seller who had gone through a shortsale approval on their home and gotten them a loan on a purchase of a new home. They would hire a credit repair company that would work to "fix" the credit and so the scores will go back up. Then they can get better financing.  

To justify whether a shortsale or foreclosure marking on the credit report is better, I still say it is best for a seller to get a shortsale approved than walking away from the property. I have heard from sellers saying that no matter which path they take, their credit is already ruined and so why would it matter anyways for them to work with the bank. I believe they are being misinformed about shortsale vs foreclosure.

Shortsales are a pain to deal with but if it works I think it is still good to go through with it.

Thank you for the good information.

Hi Jim: Although a short sale is more of a inconvenience to a seller, it can stop the pain sooner and alleviate the nagging conscience. But those credit repair companies don't do anything a consumer can't do for herself. I don't know a single attorney who recommends them.

Hi Jamie: You're welcome. And I have a ton more articles on my about.com site about short sales.

Elizabeth, is that right about the credit repair companies? I have talked to some lenders who vouch that they have used these companies and have gotten results for their clients. The lenders indicated that the scores have gotten up after they have taken over to fix the credit.

Hi Jim: I'm not saying they don't get results; I'm saying they don't get any results that the borrower can't get for herself. There are plenty of nonprofit credit counseling agencies that can help a borrower repair bad credit, and they don't charge for their services. Wherever there's a buck to be made on someone's misfortune and naivety, you'll find fortune hunters ready to capitalize.

Elizabeth, it is so true that people will find some ways to make a buck or two. As for the free nonprofit credit counseling agencies, I have not heard about them. Most of the credit repair companies that I see advertising their services charge a few hundred dollars for year service where they would work on and monitor the clients' credit. Where are those free counseling services that you mentioned above? Is that more of a local service up north in CA? With a free service, I think they would be swamped with requests and so I would not know how effective their services may be. But then again I can be wrong.

There are nonprofits such as the Consumer Credit Counseling Service, National Foundation for Credit Counseling and even HUD. Many metropolitan areas support city and county offices that provide free services as well such as the Sacramento Housing and Redevelopment Agency.

I wanted to post as promised about the loan program for folks who went through foreclosure or short sale. 

First off I wanted to make a point to let you know myself or anyone at my company is a not a fly-by-night mortgage broker out to screw someone.   My number one priority in everything we do is the client...always. I am not interested in loan fraud or pulling the wool over anyone's eyes.

This program exists and will help many folks. It offered from a perfectly legitimate lending source. I spoke to the account rep this afternoon. The buyer does need to "fit in the box". This loan can be done 6 months after a foreclosure or short sale if the buyer meets thr following guidelines:

• borrower needs to have had an adjustable rate mortgage (that defaulted) or short sale because of adjustable rate affordability
• 600 minimum FICO score (yes this is possible after a foreclosure)
• Employed at same job for 3 years
• 20% down
• Full documentation only
• cost for program is 1.25% (charged by the lender)
• Max loan amount 417k
• Gift funds OK
• Interest rate is around 7.25% (not bad at all!)
• a verification of rent is needed showing 6 months of rental history

In regards to the credit repair companies, I respectfully disagree.  I have used them to repair my client's credit so they could qualify for the loan.  Yes the borrower can do these things by themselves but what I have found is the legitimate (because like mortgage brokers not all credit repair companies are created equal) their systems , follow-up, and form letters they use on their lawyers letterhead are consistently better than a buyer doing it themselves. Erin

Hi Erin: I'm sorry you felt the need to defend yourself against a non-existent allegation of being a fly-by-night mortgage broker. I don't believe anyone accused you of trying to swindle customers in this post.

Thank you for calling your account rep, though. However, I must admit that I see a few holes in this plan. Apart from the fact that an account rep can say whatever she wants, what really counts is the number of closed transactions that person has completed. I've listened to mortgage brokers promise clients the moon and the stars, but when the time comes to perform, they fall down on the job and the loan never funds.

20% down on a $400,000 home is $80,000. Most struggling home owners who can't afford an adjustable-rate mortgage hike took out loans around 5% and when the mortgage adjusts, it jumps to 7%. If they can't afford 7%, how can they afford 7 1/4? Plus, if they had $80,000, why would they let their home go into foreclosure? I don't see very many short sale sellers fitting into that box. It seems a little contradictory inside there. :)

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There are many urban legends swirling around “out there” during this time of great economic upheaval, but some things stay the same:

1.  Lenders gossip to help each other avoid “holding the bag” resulting from a defaulting homeowner. One way they do that is to tattle to the three major CRAs (Credit Reporting Agencies)--Experian, Equifax and Transunion.  The only way that a foreclosure, short sale, NOD, 120 days past due or forbearance can be reported is via Score Factor Code #22—“serious delinquency, derogatory public record or collection.”  If there’s another less damaging manner of reporting, I’d like to know what it is.   Please review the list of Score Factor Codes and speculate what a less damaging Reason Code might be.

http://www.bayhouse.com/FairIsaac-NextGen-risk-factors.shtml

2.  Each of the events under discussion—foreclosure, short sale, NOD, 120 days past due or forbearance—are reported to the bureaus as Score Factor Code #22.  Therefore, they’re weighted exactly the same against the remaining contents of one’s credit report, whatever they may be.  If anyone doubts this, they can write to Fair Isaac at cbhelp@fairisaac.com and get it straight from the horse’s mouth.  Be sure to include your phone number; Fair Isaac is notorious for not putting anything in writing when it comes to explaining FICO scoring.  If we all knew exactly how FICO scoring worked, the jig would be up.

2.  Fannie Mae and Freddie Mac require that lenders that sell to them report derogatory credit behavior; otherwise, how are these two behemoth loan conduits going to avoid in the future the risk that a consumer with a recent short sale/foreclosure presents to them?

3.  Even portfolio lenders and credit unions underwrite loans in anticipation of selling to Fannie and Freddie.  The fact that an alleged 6-months post-short sale/foreclosure program is available at a loan amount not to exceed $417,000 indicates that they’re ostrensibly packaged for Fannie/Freddie consumption.  No lender will risk "buy back" to give a recently defaulting homeowner yet another loan.

To be unassailably certain of the underwriting guidelines of the loan product in question, Erin need only ask for the guidelines and post the relevant text here.  Then we’ll all know.

4.  When a consumer hires a credit repair company to dispute for him at the CRAs, not a single dispute letter goes out under the auspices of a law firm or credit repair company.  In reality, credit repair companies provide expensive secretarial services.  No credit repair company will disclose the letters they send out on a consumer’s behalf.  The dispute letters they send are their proprietary work product, not to be distributed for public awareness.   Any success achieved through them is no better than a consumer could achieve for himself armed with the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, a 42 cent stamp and the dispute form available at each CRA’s website.  Here’s an example:

http://www.transunion.com/docs/personal/InvestigationRequest_Chester.pdf

If anyone doubts this, try asking any credit repair company for a true copy of the letter(s) sent on behalf of the consumer.  Not a single credit repair company will comply with your request.

I recommend this very helpful website for DIY credit repair. Everything a consumer could possibly need to effectively repair one's credit is revealed here.

http://www.fool.com/seminars/ev/index.htm?sid=0029

It should be remembered that no matter how gut wrenching the current mortgage crisis is, lenders, as a collective consciousness if you will, are trying to avoid moral hazard. Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company.

Currently, there’s no doubt that the lending industry is experiencing the full consequences of its irresponsible lending policies.  But that doesn’t mean they’re going to lay down and allow the other parties to the irresponsibility love fest (borrowers) to dictate the terms of their recovery.

Ain’t gonna happen, folks.

Well done, Catherine. I applaud your expertise and knowledge. Thank you for sharing it.

As I mentioned previously I personally have never closed this type of loan.  I can only go off of my coworker's (who have closed them) experience and the account rep for information.  My attempt in my posts on your blog was to point out a different perspective than what you laid out in your article. I will leave it at that.  Erin

I searched at Fannie Mae's Selling Guide online to provide you with the actual underwriting guidelines that all lenders must follow if they hope to sell their loans to Fannie Mae:

X, Chapter 8: Credit History (06/30/02)

The borrower’s credit history should demonstrate his or her past willingness and ability to meet credit obligations in a way that will enable the lender to draw a logical conclusion about the borrower’s commitment to making payments on the new mortgage obligation that he or she is undertaking. A lender’s evaluation of all aspects of the borrower’s credit history to determine whether the borrower has demonstrated a willingness and ability to manage his or her financial commitments is a key element in determining the comprehensive risk for a mortgage.

Because borrower credit histories are presented in a relatively complex way—the number of accounts; the different types of accounts; variations in the use of credit; the incidence, seriousness, and age of delinquencies, etc.—it is sometimes difficult to determine whether a given credit history is acceptable or unacceptable, a strength or a weakness. Credit scores can assist in quantifying the strength or weakness of a borrower’s credit risk in an empirically sound way, thus enabling an underwriter to base his or her subjective decision about a borrower’s creditworthiness on more quantifiable measures. This leads to a better assessment of the unique aspects of each borrower since the underwriter will be able to offset weaknesses identified in a given mortgage application by the borrower’s quantifiable strengths. For this reason, we expect a lender that manually underwrites the mortgages it delivers to us to attempt to obtain a credit score for each borrower applying for credit. However, the lender may use other methods of assessing the borrower’s credit history if it is unable to obtain a credit score because the borrower does not have sufficient credit to enable the development of a credit score or does not use the type of credit that is reported to credit repositories—or if it obtains a credit score that is invalid because of erroneous information in the borrower’s credit records. (The lender must obtain a credit score when it wants to offer a borrower financing using some of our mortgage products.)

X, 801: Determining an Established Credit History (06/30/02)

It is the borrower’s overall credit management skill—including repayment patterns, credit utilization, and level of experience in using credit, not solely the existence of delinquent credit accounts—that has an effect on the eventual default risk of a mortgage. Therefore, the lender needs to understand the complete credit history for each borrower listed on the mortgage application, which can be accomplished only through an analysis of the borrower’s established credit history. The extent of this analysis can vary based on whether the lender uses credit scores, a traditional credit history, or a nontraditional credit history to assess credit risk.

A borrower who has experienced credit or financial management problems in the past may have elected to participate in consumer counseling sessions to learn how to correct or avoid such problems in the future. Whether the borrower has or has not completed his or her participation in the sessions before closing on the mortgage transaction is not relevant since it is the borrower’s credit history that is of primary importance. If the lender is able to obtain a credit score for the borrower, it does not have to evaluate the borrower’s credit any further. However, if the lender is not able to obtain a credit score, it must evaluate the borrower’s credit in accordance with Section 803.

X, 803.02: Payment History (06/30/02)

The lender must review the borrower’s credit report to determine the current status of each credit account (including mortgage accounts), the timeliness of payments, and the frequency, recency, and the severity of any delinquent payments. On the date of the loan application, the borrower’s existing mortgage must be current (which means that no more than 45 days may have elapsed since the last paid installment date). (If the credit report does not include the mortgage payment history for the previous 12 months or longer, the lender also should review the previous mortgage payment history that was provided by the mortgage servicer.)

The presence of significant derogatory credit information—bankruptcies, judgments, liens, collection accounts, foreclosures, deeds-in-lieu, or a consistent pattern of delinquent accounts—dramatically increases the likelihood of a future default and represents a high credit risk. However, this does not mean that the borrower’s credit will not be acceptable; rather, it is an indication that—before making a final decision about the acceptability of the borrower’s credit history—the lender needs to determine the cause and significance of the derogatory information, verify that sufficient time has elapsed (based on the type of derogatory information), and confirm that the borrower has since re-established an acceptable credit history.

The lender should request the borrower to provide a copy of appropriate documentation to establish the date of a previous foreclosure or deed-in-lieu or a copy of the applicable bankruptcy documents (to confirm the bankruptcy discharge date and identify any debts that are not satisfied by the bankruptcy). The borrower must have paid off any debts that are not satisfied by the bankruptcy, or must have an acceptable repayment schedule established for them. The lender generally does not need to include in the individual underwriting file any other documentation that it obtains to explain derogatory information in the borrower’s credit file. However, if the borrower claims that the derogatory information is the result of extenuating circumstances, the lender should retain not only the documentation that supports the borrower’s claim, but also a letter from the borrower explaining the relevance of the documentation.

When the borrower’s credit history includes significant derogatory information, the lender must confirm that the borrower has re-established an acceptable credit history and that sufficient time has elapsed since the date of the last derogatory information. We generally require four years to elapse before we will consider the borrower to have a re-established credit history. We will, however, consider two years as an acceptable interval for re-establishing a credit history when the derogatory information in the borrower’s credit record resulted from documented extenuating circumstances or when the derogatory information relates to a Chapter 13 bankruptcy (regardless of the reasons that contributed to the bankruptcy). Elapsed time is measured by comparing the date of a new mortgage application to the date that (1) a Chapter 7 or 11 bankruptcy was discharged, (2) a Chapter 13 bankruptcy repayment plan was successfully completed and the bankruptcy discharged, (3) a foreclosure sale was held, (4) a deed-in-lieu was executed, or (5) an issue related to any other significant derogatory information was resolved.

When a borrower’s previous credit history included a bankruptcy or foreclosure-related action, all of the accounts in the borrower’s credit report must be current as of the date of the mortgage application. In addition, the borrower’s credit record under the re-established credit history must include:

I think the proof is in the puddin'.  Erin, I'm emphatically not calling you a liar, but absent either (1) the name of the lender allegedly providing the loan you described; or (2) the actual guidelines that verify the loan parameters you described, I'm unwilling to accept that such a loan even exists.

Interesting discussion.  I do have one short sale listing.  The sellers have both lost their jobs, can't make the payments.  They feel like they want to sell the house as a short sale not so much to save their credit, but they feel like they are actively doing something about their situtation. 

Thanks for sharing your point of view, Erin. I appreciate the time you took to follow up. That was thoughtful of you.

Hi Catherine: Is it possible that Erin's lending source is a subprime lender?

Hi Carolyn: Doing short sales for sellers often eliminates the nagging conscience and it makes them feel proactive. Yikes, I hate that word proactive.

Carolyn, your clients would be better off, in my opinion, living in their home, housing expense free, until foreclosure, even though you won't earn a commission through short selling it.  There's still a social stigma attached to foreclosure but, if I were those homeowners, I'd get over it for the sake of their economic future.

Elizabeth, there are practically NO subprime lenders left and, even if there were, they wouldn't make a loan like that unless the LTV was extremely low.  I'm truly perplexed by Erin's assertion that co-workers have closed a loan like she described.  I would respectfully ask her to reveal the name of the lender and/or post excerpts from the underwriting guidelines here.  This is not a challenge so much as an opportunity, if this loan exists, for other homeowners to find respite in such a loan.

There's an important distinction between "subprime" lenders and "hard money" lenders.  Subprime lenders are institutional; they have no interest in taking back the property in the event of foreclosure although, when default occurs, that's exactly what they must do.

A hard money lender typically has no interest in taking back the property in the event of default, either, but they most certainly will, too, and quickly.  A hard money lender will foreclose faster than an institutional lender, particularly in these times.

Then there's another category of hard money lender, the "loan-to-own" hard money lender whose GOAL it is to own the property and so HOPES the borrower will default. That's the only type of lender I can even imagine would fund a loan like Erin described and, even then, they require much more equity.  Such a lender would already be 20% (required down payment) ahead of the game at the time of closing but that's typically not enough equity--which is why I doubt the veracity of Erin's claim.

Another thing that strikes me as implausible is, if the homeowner has only six months ago gone through the financial trauma of foreclosure, why would the subsequent lender require a minimum FICO score of 600?  Under the circumstances, what has a FICO score to do with anything?  In light of demonstrable default, it's just a number.

Like Elizabeth, I wonder how the typical consumer could come up with 20% for a down payment when only six months ago he couldn't afford the monthly payment to keep himself in his home.  Won the lottery, maybe?  Or we're talking about a consumer who, seeing his equity evaporate faster than you can say "real estate bubble," takes his remaining assets--which could be considerable--and walks away from one lender into the loving arms of this new lender who doesn't seem to think such a homeowner would default again if the downturn continues. 

Elizabeth wrote:  Well, Bob, maybe you're one of the lucky ones who won't ever have to be involved in a short sale. For your sake, I hope you are spared.

Actually, Elizabeth, short sales can be a lucrative adjunct to a realtor's pipeline, provided, in my opinion, that they don't negotiate the short sale themselves. Negotiating short sales with all the messed up banks is time-consuming, detail oriented and exasperating.  It's not uncommon for a single short sale package to be submitted 5-6 times before it's acknowledged by the lender as being received.  The average employment turnover of a lender's loss mitigation representative is six months.  It's not unusual to wait 45 minutes to 1.5 hours on hold for a status update.

Lender loss mitigation representatives rarely call out, so progress is made by the short sale negotiator making a pest of him/herself until action is taken.  If you're going to take short sale listings, just resolve to turn the matter over to a full time short sale negotiator for a fee.  You may earn less net-net, but you wouldn't have had that opportunity to earn a commission, anyway, absent the short sale, so what's the difference?

Disclosure:  In addition to originating loans, I'm a full time short sale negotiator. 

Hi Catherine: You're telling me it's time consuming. That's why I partner my short-sale negotiations with an agent / lawyer in my office. She's very tough, disciplined and tenacious, spending most of her time hammering banks, which frees me up to do other things that I actually enjoy while still obtaining excellent results for my clients.

Sounds like you have the drill down, Elizabeth.  Good for you.

Thanks, Catherine. Hey! I see you are linked now. Good job!!! But let me tell you, my fingers are getting tired of running that scrolly wheel just to get to the bottom of this post. LOL.

I think I shall take a break and play a few rounds of Bejeweled . . .

Elizabeth, I don't seem to be getting the hang of (1) fonts (2) spacing and (3) editing.  Is there a tutorial on this site on how to post so that huge spaces don't occur between paragraphs?

Wow!  This was a great post!  I read every single comment but am still not sure what the facts are.  Before reading it, I was told and had read that it is better than a foreclosure and it was possible to secure another mortage in 2 years.  I also read that if someone had excellent credit, 750 or higher, before the short sale and this was the only "bad" thing, they would be in much better shape.  I am meeting with a couple this week who are behind on their mortgage payments and we will be talking short sale.  It sounds like all the circumstances involved need to be considered.  Is the mortgage the only thing they are behind on, or is it everything else as well?

Susan, the rules have changed considerably since this thread began.  Please see Elizabeth's blog entry regarding the new rules that apply to short selling homeowners based on this Fannie Mae Announcement:

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf

Basically, the following actions are considered "foreclosure" by Fannie Mae:

Short sale

Foreclosure

Deed-in-lieu

Lates over 120 days

Forbearance agreement

Notice of Default

Previously, they ALL required that four years pass between the conclusion of the event and a new loan.  A few months ago, Fannie Mae increased the "seasoning" period to five years.

Then, day before yesterday, per the link above, Fannie Mae plucked "short sale" out of the list and said:

Establishing a new policy for preforeclosure sales [short sale].  A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.  

In addition, the borrower must show that s/he has re-established credit by attaining a FICO score of 680.  The best way to do this is for the homeowner to PAY ALL HIS/HER OTHER BILLS ON TIME and maintain credit card balances below 50% of credit capacity.

This is good news for the distressed homeowner because it means that, with a bit of patience and sound debt management, s/he can be back in the home-buying game in two years.  For this reason, short sale is eminently better for the distressed homeowner, assuming that s/he wants to purchase a home again in the relatively near future.

Regardless of the perceptions of those not in the mortgage business, and possibly based on what they hope Fannie/Freddie's position ought to be, Fannie/Freddie's guidelines govern, as explained in the Announcement posted.

Catherine, thank you so much - at least now I can explain this to my client with some facts under my belt - terrific post!

You're welcome!  I think we're all on the same page now, thanks to Elizabeth Weintraub's dedication to The Truth--not what people want to hear--so that we're all playing the game properly and profitably.