Federal housing authorities want to make it easier for people who lost their homes due to bankruptcy or foreclosure as a result of the economic downturn five years ago to qualify for a new mortgage — sooner rather than later.
The Department of Housing and Urban Development last month changed its rule requiring a three-year waiting period for people who have lost a home due to foreclosure or bankruptcy, opening the door for them to buy another home in only one year as long as they have fixed whatever financial problem caused them to lose the previous home.
“Three years can be a long time for a family to wait for a loan, and putting money into a rental instead of an investment can result in a loss,” said Don Frommeyer, president of the National Association of Mortgage Brokers in Plano, Texas.
“This is an effort to help boost the housing industry, which is a major part of jump-starting the economy.”
At a time when interest rates are ticking up and new mortgage applications are on the decline, the rule change could make more people eligible for mortgage loans, even if their credit was ruined during the Great Recession.
But the Achilles’ heel of the rule change is that banks and other mortgage lenders are not required to abide by it.
The new rule, published Aug. 15, gives financial institutions the option of reducing the waiting time to one year for troubled borrowers. But many are likely to stick to the old three-year waiting period.
“The reality of the new HUD rule is it won’t change anything,” said Tom Hosack, president and CEO of Northwood Realty in Franklin Park. “The lenders actually have more stringent internal requirements than HUD does anyway. Lenders still do not feel comfortable lending to people one year out of bankruptcy and are still requiring them to wait longer.”
He said at the height of the housing boom lenders were more impressed with the value of the collateral than the creditworthiness of the borrower. Institutions had the idea that even if the borrower defaulted, the bank could always get its money back from the sale of the property, which at that time seemed headed nowhere but up.
Now with memories of the housing crash still fresh, lenders have gone back to closely scrutinizing the credit history of borrowers to determine their likelihood of repaying loans.
“Banks are being a little too overcautious,” Mr. Hosack said. “But it is the byproduct of them being too liberal for too long. … People who had a bankruptcy or foreclosure are more likely to have a second one, and banks want to make sure people have their act together before making a loan to them.”
Mike Blehar, principal at Green Tree-based financial services company Fort Pitt Capital Group, said he often works with clients who are either buying a new home or refinancing an existing one, which means he deals with several banks.
Even for affluent clients, buying and refinancing real estate is not always a smooth process.
“Every so often, it is a real struggle for some of them to qualify for a refinance,” he said, adding that one case seemed particularly puzzling.
The client, who is an executive for a major corporation in Pittsburgh, was refinancing his home and had to provide a mountain of documentation to show he was a qualified borrower.
What was striking about the case, Mr. Blehar said, is that on the day of the closing, the mortgage company called his client’s office to verify he was still employed even though they had already checked two weeks earlier.
“These mortgage companies are so worried about getting burned again by making bad loans they will go to extremes to make sure they have a qualified borrower,” he said.
An improving economy could bring more people back into the real estate market although, for now, it seems rising interest rates have caused a slowdown.
The Mortgage Bankers Association reported that mortgage applications fell last week 13.5 percent compared to the previous week, marking the eighth drop in 10 weeks. Since the first week of May, the average rate on a 30-year fixed mortgage has jumped from 3.35 percent to around 4.6 percent.
The decline in applications has led several major banks such as JPMorgan, Bank of America and Citigroup to scale back on their mortgage operations, causing thousands of employees to be laid off.
Wells Fargo & Co., the largest U.S. mortgage lender, announced it expects to make 30 percent fewer home loans this quarter due to rising interest rates.
Meanwhile, the Federal Housing Administration will green-light mortgage applications for people who lost their jobs, filed bankruptcy or saw their income reduced by 20 percent or more for a period of at least six months, as along as they can show that it occurred as a result of the recent recession.
The problem must be fixed, and the borrower must show a record of making at least 12 months of on-time payments on all their credit accounts.
They also will need to complete a housing counseling course and meet all other HUD requirements.
Mr. Frommeyer said every lender maintains what is known as an “overlay,” which is its own lending requirement, used in coordination with FHA’s requirements. For example, he said, FHA actually has no minimum credit score requirements for borrowers, while each financial institution has its own minimum score ranging from 680 to 580.
“This is an effort to lower the standards for mortgage loans, but there is no guarantee banks will participate,” Mr. Frommeyer said.
“Let’s face it. The economy is not where it really needs to be yet. This is a way to try to help borrowers who couldn’t make payments. But it’s not an easy fix.”