Introduction. On September 2, 2013 the online Wall Street Journal carried an article that should be of interest to thousands of folks who have weathered the last five years of unpleasantness, but in the process suffered a short sale, foreclosure or perhaps a deed-in-lieu-of-foreclosure. The full article can be found here.
For the past three years, the common belief was that if one went through one of these three distressed housing events, it would be 3, 5, or 7 year wait before they could ever expect an opportunity to buy another home again. This seemed to be confirmed in FNMA’s online underwriting matrix. [Go to link here.]
However, as I have told my clients during this time – which was a mix of compassion, hope, and a dose of common sense – these numbers were developed early on [circa 2010], when the federal government and banking industry conditioned their help upon the concept of “deservedness.”
Back then, officials and lenders seemed to believe that those engaging in some form of distressed housing event, such as a short sale, must have suffered an adverse lifestyle change, such as illness or job loss, before they would deign to consent to the sale. In such cases, with all the accuracy of a soothsayer, they concluded it should be a 2 – 4 year wait before the former homeowner could come back into the marketplace and get another home loan backed by FNMA. If the property was foreclosed, the powers that be ruled that the wait should be 5 – 7 years. This was in 2010, mind you. Back then, the policy-makers figured the housing crisis would be over in a couple of years, and would never be as long and deep as it was. Wrong! Moreover, they also figured that there would be plenty of other borrowers to fill the void. Wrong Again! Lastly, they erred in their belief that the borrowers who suffered a distressed housing event were deadbeats who would not be missed by the lending industry. Strike Three!
The Real Story. Why were the FNMA brainiacs so wrong? Because they all had ears, but refused to listen; they had eyes, but refused to see; and presumably, they had minds, but refused to understand. They did not actually meet or commiserate with the folks to whom the distressed housing events were occurring. In short, they did not walk a mile in the other person’s shoes.
I have. My conclusion is that a distressed housing event could have happened to anyone of us. [Who among us in 2004 – 2007 weren’t looking, or considering looking, to buy real estate? It was regarded as a “sure thing.” Property never lost value – right?] The vast majority of the folks who suffered distressed housing events did nothing stupid, illegal, or wrong. If Alan Greenspan, our illustrious former Chairman of the Federal Reserve did not see the crisis as it was bubbling up on his watch, why should John Q. Public have seen it?
For example, if John Q. Public took out a loan in 2007 – 2008, how was he to know that the credit and housing markets would soon seize up, causing a 30% – 50%+ loss in home values? So even if he had perfect credit, paid 20% down on a 30-year loan, and did everything else right, he was guaranteed to lose all of his downpayment equity and be severely underwater the following year. From that point forward, he had few choices, and none of them attractive: (a) Continue pouring good money after bad, building up zero equity, and with no end in sight; (b) Stop making his mortgage payments, let the bank take his home, ruin his credit, and move on; or (c) Try to do a short sale where the property sold for less than the mortgage debt, ruin his credit, and then move on.
Early in the financial crisis, circa 2008 – 2011, most lenders viewed John Q. Public with disdain, as if he was a deadbeat that was foolish enough to bite off more than he could chew. It has not been until the past couple of years that the Big Banks and the federal government have realized that their perception of “deservedness” was skewed by the view from their Ivory Tower. In short, they knew nothing – or next to nothing – about what brought most distressed homeowners to the situation they were actually facing.
What’s Happening Today? For the federal government and the lending industry, reality has set in.
- Despite historically low interest rates, buyers have not been flooding into the real estate marketplace. Yes, some areas are busy, but that is as much attributable to pent-up demand, more confidence, and a five year hiatus that has brought in a new generation of borrowers.
- Analysis of former distressed homeowners is beginning to show that their historic credit scores were generally good, excepting only a single black-mark for a short sale or foreclosure.
- The numbers of these former homeowners are sizeable; the FNMA underwriting requirements are stale and were based upon an incorrect belief that there would be more risk associated with making another loan to such a person anytime soon.
- The lending industry’s concept of “deservedness” is passé and unrealistic. That is why most short sales are routinely approved today if the lender confirms that the offering price is consistent with the current value of the home. While lenders still insist upon getting a hardship letter from their borrower/seller, the likelihood of a good short sale being rejected because “the hardship isn’t hard enough” is a rarity. [I have never seen it.]
- Lenders have finally awakened to the realization that a short sale is in their best interest, since (a) the property gets back into the marketplace sooner, and (b) their net-net recovery is better than through a foreclosure.
Finally,The Good News. Now, with the realization that adding a dose of forgiveness to the short sale and foreclosure process will increase the pool of potential homeowners – and new borrowers – the FHA has effected a rule change that:
“…lets certain borrowers who have gone through a foreclosure, bankruptcy or other adverse event—but who have repaired their credit—become eligible to receive a new mortgage backed by the Federal Housing Administration after waiting as little as one year.”
The new rules will remain in place for three years. Here are the two primary requirements:
(B)orrowers must show that their foreclosure or bankruptcy was caused by a job loss or reduction in income that was beyond their control.
Borrowers also must prove their incomes have had a “full recovery” and complete housing counseling before getting a new mortgage.
The article notes that it isn’t clear the Big Banks will immediately embrace the new rule, as they continue to face FHA “put-back” suits for selling the agency poorly underwritten loans during the Go-Go days leading up to the financial crisis.
According to the Mortgage Bankers Association:
It’s difficult to see how lenders would even consider doing mortgages with higher risk” in the current environment, said David Stevens, the chief executive of the Mortgage Bankers Association, who served as the FHA’s commissioner from 2009 to 2011. Lenders aren’t going to expand credit “while you’re suing them and threatening them over minor errors.
[Note: The term “minor errors” is in the eyes of the beholder. Most of the Big Banks build in reserves for these put-back suits, and it is an anticipated cost of doing business with the FHA and the GSEs. I suspect Mr. Stevens is doing what he’s paid to do – politic the issue. Put another way, does he think refusing to cooperate with the administration will reduce the put-back claims? ~ PCQ]
It is true that the FHA is now the de facto subprime lender in today’s market. Without the availability of the old “no-doc” and “stated income” loans, there needed to be a place for folks with less-than-prime credit could borrow. Today, the FHA fills that void. It will make loans to borrowers who do not have prime credit scores and the minimum downpayment can be as low as 3.5%. The agency can do this because if the loan meets government’s underwriting standards, there is insurance [paid for by the borrower] that is placed on the loan in the event of default.
Conclusion. Clearly, this policy change is a good one and the White House is to be congratulated. Loosening up FHA underwriting by allowing otherwise creditworthy borrowers back into the marketplace is a good thing. But alone, it is not enough to deal with the goal of increasing home ownership. Employment must improve to have the desired effect of putting more Americans back in homes. Unemployment and underemployment continue to devastate the ranks of potential homeowners. That is the other side of the equation that the White House continues to ignore.