This is my column for this week from the Arizona Republic (permanent link).
Seriously, who’s a better risk for a mortgage than someone who has already lost a home to foreclosure?
We talked last week about credit flexibility among merchants as they try to find ways around the banking crunch. The flip side of the same coin is how the credit marketplace will react, going forward, to home foreclosures.
You’ve heard all your life that a foreclosure is second only to a bankruptcy in the way it will ruin your credit. This is still true, but “ruin” may turn out to be an adjustable calamity.
Here’s why: A lot of people are going through foreclosure. Ninety percent or more of homeowners are unaffected by the wave of bank repossessions, but that still leaves millions of people who are going to have a foreclosure on their credit for the next seven years.
What’s going to happen to those folks when they go to the furniture store or the jewelry store or the car dealership? They might end up paying a higher interest rate, but they’re still going to get financing.
I have been advising my investor clients for months to ignore recent foreclosures on credit reports. Past performance on every other sort of credit account matters a lot. But if landlords refuse to rent to folks who have lost their homes, they will be turning away half or more of the tenant population.
My take is that, right now, a recent foreclosure is like hospital debt: If everyone else was getting paid before, during and after the financial catastrophe, you just have to look past the elephant in the room.
And here’s the funny part: I am sure this will apply to home loans in due course, also. If mortgage money remains freely available, lenders will find a way to overlook recent foreclosures in order to underwrite new home loans.
We can hope that, this time, interest rates will reflect the true risk lenders are taking on. But this country runs on credit. Just because a borrower recently defaulted on a six-figure debt, that’s no reason to withhold the unlimited boon that is homeownership.
In America, we can sell ourselves on anything — provided we don’t have to pay for it today.
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Brian Brady says:
Currently, lending guidelines recognize the foreclosure for what it is; a catastrophic but not life-ending event.
FHA loan allow for a new mortgage just three years after the foreclosure. VA loans allow it after two. Agency conforming loans (often considered the best terms) require five years.
Risk is appropriately built into the loan programs. Both VA and FHA loans have an initial “premium”, financed into the loan, that is charged to the borrower. FHA has a monthly insurance premium. Conventional loans, with the longest waiting period, don’t assess a premium.
Borrowers beware, though! Should you default on a government-insured loan (FHA or VA), that shortage may follow you around forever. Make sure you can afford the payments.
December 6, 2008 — 11:23 am
Gary Frimann says:
Excellent point. I always tell investors that landlording is an art–not a science. Vacancies sting and kill, good tenants are sometimes hard to come by.
But, today people are just walking away from homes, in a short sale, and that will affect their credit as well. My strong hunch is that will come back to bite them, as lenders can change the rules of the game any time… Remember C.L.U.E. reports, and that simple broken pipe turned into nighmare for the subsequent homeowner to get insurance at a reasonable price?
I think a short sale or foreclosure showing up could be derogatory for more than the current timeframe sometime in the near future, and yes, these borrowers should pay maybe a percentage or two interest rate premium.
Any lawyers out there? I’m sure you know the credit rules, but might have been advising clients to just walk away, which is OK under today’s rules, and probably advised them that the lenders are too busy to go after them, which may be true, so they stayed in their homes for 6-8 months, rent free, and did a short sale. Now, what they saved on housing costs has allowed them to perhaps have more money than they ev er have had in their life, if they went in with 100% financing. Will they be “punished” in the future? Perhaps, they should be. Licensees who wrote their own loans for their own behalf, should be put in jail, and I hope the Gov’t aggresively goes after those spoilers. I felle they have messed up a significant portion of the market. If blame needs to be placed anywhere, this would be a good place to start, especially in non-recourse states like CA where I live.
Some people think that home financing is easy, like getting a car loan, as they have never experienced tighter lending guidelines, such as are (once again) in place today. 2002-2006 was a fluke. Reserve requirements and income requirements and appraisal requirements are much tougher. Pledge your first-born male child.
As I’ve said, landlording is an art. Landlords should remember that a long term tenant with a minor set back in life should be given more slack than a tenant who is just an out and out deadbeat.
Unfortunately, I think most people would rather have a sort term freebie for a housing expense than face a contractual obligation. Even basic, responsible, normally good, people, I feel, will walk when their house is upside down. It’s a shame.
Thye good news is that I believe the market will return, as it always seems to. Some people will NEVER be able to get buy a house again, as we will never in this lifetime go back to the loose underwriting standards we once had.
December 6, 2008 — 1:21 pm
laurie mindnich says:
Greg, I’m glad to see the insight offered by you.
Having just visited with clients that suffered the events of the foreclosure process (and it’s a loooong one in NY), they are making an offer for an owner carry in another state.
The owner would be wise to consider it: foreclosure notwithstanding, these people have a pension; jobs; ability to pay. When they took advantage of a much pushed credit line (we all recall the days) and the market turned, that 450k (and corresponding payment) became unmanageable. Why it was loaned in the first place is beyond all of us, but there you have it.
With pricing in their new location ONE QUARTER of the amount that was let go, they’re renters seeking an option to buy.
People made big mistakes. The market buried them. They “get it”, and hopefully will find an opportunity that permits them to move on, comfortably within their financial means.
December 7, 2008 — 2:25 pm
Martin Bouma-Ann Arbor Real Estate Expert says:
People make mistakes, and the market has hurt a lot of those people that got caught up in the huge “buy now, pay later” mentality that has taken over our country, but I have to agree that as bad as a foreclosure is, it isn’t the end of ever owning a home-it will just mean your interest rate will reflect the risk (hopefully correctly this time around).
December 7, 2008 — 9:28 pm
William says:
People that recently lost a home from foreclosure likely have a lot of debt to cleanup before they can buy a new home.
I think it is funny that I am more credit worthy then the company that issued my credit card (Citi).
It’s a shame, but some order needs to be restored in how money is loaned and common sense used by those attempting to get a loan. The good ole days of easy credit are gone.
Look at the latest statistics on home loans that were refinanced as part of the HOPE program. Almost half of these homes are already in default again!
December 8, 2008 — 8:21 pm
J Boyer Morristown NJ says:
I am sure lots of things are going to change over the next few years. I think there will be a difference noticed between those who only have the foreclosure on their record as compaired to those who have other things as well. Since we don’t have that many foreclosures up here I don’t have an overwhelming amount of experence with them, but I have had 3 different past clients who were sub-prime who I believe should not be given nice treatment on credit, because these people just don’t pay much of anything on-time consistently.
December 8, 2008 — 8:22 pm
Stella Frize - Long Beach CA. Real Estate says:
Very well stated. I personally have rented my investment properties to people who have lost there home. They were excellent tenants. I think they’ll just get a highter rate
December 10, 2008 — 10:03 pm
Leon Belenky-One Bal Harbour Condo Expert says:
Nicely stated. I do think that down the road, people with foreclosures that were caught up in the arm and interest only loans they just couldn’t keep up with will be able to once again gain home ownership-just at a higher set rate. There will always be those people thought, that don’t take responsibility and pay their bills, no matter what. Those will be the ones that hopefully will not be offered home loans again so we can avoid this whole housing crunch from happening again.
December 10, 2008 — 10:55 pm