NY Times: Years After the Market Collapse, Sidelined Borrowers Return

By Tara Siegel Bernard

Tracy S., 59, a technical writer for a large bank, divorced her husband just as the
housing market spiraled downward. They were forced to sell their home, just
outside Phoenix, for less than they owed, and the bank agreed to absorb the
difference, about $25,000.

“Our ability to pay and our credit was perfectly fine, but neither of us could
keep the house individually,” she said. Ultimately the house sold for about
$175,000, or 21 percent less than they originally paid.

Three years after the short sale, Tracy is a homeowner once again. She bought
a three-bedroom house for $190,000 in another Phoenix suburb this year, and
qualified for a traditional mortgage with a 20 percent down payment.

“I believed and was told that I was not going to get a mortgage for the first two
years after the short sale,” she said, asking that her last name not be used to
protect her privacy. “But after that, I hadn’t really planned and didn’t think I
would be able to get a mortgage.”

So far, she has been in the minority. Through the end of last year, only a tiny
sliver of borrowers tarnished by foreclosures and short sales during the economic
downturn had bought homes again, according to a study by Experian, one of the
Big Three credit reporting bureaus. These borrowers are generally locked out of
the mortgage market for two to seven years, depending on their circumstances.

But now, four years since foreclosures and short sales peaked in the Great
Recession, millions of former borrowers have spent the required amount of time
on the sidelines, which means they have cleared at least one of the major hurdles
required to qualify for another government-backed mortgage. Whether the rest of
their financial lives have sufficiently recovered — or whether they even want the
burden of a new mortgage — are still open questions. But there is early evidence
that some former borrowers are slowly returning.

“We certainly have heard from a number of lenders that boomerang buyers
are coming back,” said Michael Fratantoni, chief economist at the Mortgage
Bankers Association. He added that the situation varied across the country
because the foreclosure process takes longer in certain states.

Bank of America, one of the nation’s largest lenders, said that of all its
approved loans and loan applications from January through September, only
about 1 percent came from consumers with short sales or foreclosures. But some
mortgage brokers report that more people are calling: Deb Klein, senior mortgage
loan officer at Cobalt Mortgage in Chandler, Ariz., said 10 to 15 percent of the
loans she closes are for people with distressed home sales in their recent past. For
Rick Cason, of Integrity Mortgage near Orlando, Fla., it is two to three loans out of
every 10. Erik Johansson, a mortgage lender in Chicago, calls it a “steady drip that
has been increasing over time.”

There is a range of different requirements for obtaining new loans. In August,
for instance, Fannie Mae tweaked its rules for borrowers who went through short
sales and those who voluntarily signed a home over to a lender (through what is
known as a deed in lieu). Fannie said it would continue to permit loans as soon as
two years after those events hit borrowers’ credit reports, as long as they could
document that something like a job loss or a divorce pushed them over the
financial edge. (They also need a down payment of at least 5 percent.)

But if they cannot prove they had a financial hardship, consumers must now
wait four years after the event. (Previously, borrowers without hardships could get
a loan after two years with at least a 20 percent down payment, or after four years
with at least 10 percent.) Someone who went through a foreclosure must wait
seven years after it was completed, or as little as three years with “extenuating
circumstances” (and make a 10 percent down payment). Freddie Mac has similar
guidelines, but it requires a 10 percent down payment for seven years across the
board.

Many lenders have tighter rules, regardless of what Fannie and Freddie
permit. And Bank of America, Wells Fargo and JPMorgan Chase all said they had
decided not to participate in the Federal Housing Administration’s Back to Work
program, where borrowers who experienced some form of financial upheaval, such
as a job loss, may be able to get a loan backed by the agency just a year after the
loss of a home. (Normally, the F.H.A. requires borrowers to wait three years.)

Since the program’s inception in August 2013, a mere 337 borrowers had received
loans through September.

Still, the pool of potential so-called boomerang buyers has increased: 3.5
million borrowers lost homes to foreclosure between 2006 and 2010 and an
additional 757,500 went through short sales, according to RealtyTrac, which
means they are all at least four years from the event. At least 5.3 million are
estimated to have met the period required for loans backed by the F.H.A., which
has less onerous rules but generally more costly fees and insurance.

“The behavior of these potential boomerang buyers will be a big part of
shaping the U.S. housing market going forward,” said Daren Blomquist, vice
president at RealtyTrac. “The bigger question now becomes how many have the
stomach for homeownership again and how many will stay as long-term renters.”

Only a small fraction of people had actually qualified for new mortgages
through last year: Of the nearly 5.43 million owner-occupied homes that were
foreclosed on after 2007, only 2.1 percent of the borrowers, or 114,100, had
repurchased a primary home through the end of 2013, according to Experian,
which reviewed 10 percent of its 220 million credit files.

And of the nearly 809,000 short sales on owner-occupied homes that
occurred after 2007, 44,300 or almost 5.5 percent of the owners bought another
through the end of 2013.

Tammy and Mike Trenholm completed a bankruptcy in 2009 and a
foreclosure in 2010. But in March, they bought a five-bedroom home in the
Atlanta suburbs for $300,000. They qualified for a loan through a program backed
by the Department of Veterans Affairs, which is more forgiving than other
programs: It will generally evaluate borrowers two years after a bankruptcy or
foreclosure.

Their housing troubles started in Charleston, S.C. They bought a
five-bedroom for $570,000 in 2005, when the housing market was still skybound.
The next year, they bought an empty lot on their block to build a new house. They
planned to sell the old one, making some money in the process. “But it didn’t turn
out that way,” Ms. Trenholm said.

Their contractor made several expensive errors. And by the time the new
house was ready, the market had collapsed and they could not sell their older
home for enough money. They ultimately had to file for bankruptcy, and the new
house was foreclosed on. That took a toll on their credit scores, which are
recovering. “It was a matter of enough time passing,” Ms. Trenholm said.

Even with the passage of time, for many former borrowers, the experience is
still fresh. “I see a lot of people coming back into it with eyes wide open,” said
Angel Johnson, a real estate agent with Redfin in Phoenix. “They can get a loan,
but they are still spooked.”

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