For foreclosure casualties, the painful process doesn’t end the day the bank repossesses the house.
Foreclosure essentially comes with a timeout period for distressed borrowers. Lose your house, and you’ll be renting for at least three years.
Some foreclosure victims will now spend less time on the housing sidelines. Two years less.
The Department of Housing and Urban Development altered Federal Housing Administration mortgage guidelines earlier this month.
The rules make those foreclosed upon due to a temporary loss of employment or income eligible for FHA mortgages after 12 months, provided they can prove income recovery, show a clean credit history and meet the agency’s other guidelines.
“FHA recognizes the hardships faced by these borrowers and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage,” wrote Assistant Housing Secretary Carol Galante in a letter outlining the rule tweaks.
Local real estate and lending industry insiders called the changes “common sense.”
“We saw a lot of good borrowers get caught up in things beyond their control during the recession who have since righted themselves and would otherwise be considered good credit risks,” said Michael Caputo, a loan officer with Starkey Mortgage. “The notion of ‘No, you must wait’ just doesn’t make sense.”
The FHA eligibility changes won’t “open the floodgates” to recently bitten borrowers, Caputo said.
Applicants who have suffered what the FHA deems an “economic event” — loss of employment or income leading to a 20 percent drop in household income for six months or more — must demonstrate recovery through paystubs or other documentation. They also must show no history of delinquency on rental housing payments and other creditor bills, have no collections on record and complete housing counseling.
They must also meet FHA’s other guidelines, including credit score, down payment and mortgage insurance minimums.
“If you were chronically delinquent on your mortgage before you lost your job and ended up in foreclosure, you’re not going to be dropped back in the pool,” said Marlene Buhler, president of the Mortgage Bankers Association of Savannah and a vice president at The Coastal Bank. “It doesn’t apply to all.”
Still, Realtor Donna Davis expects the FHA changes to have an impact locally. The percentage of homes purchased utilizing FHA mortgages is down several percentage points in 2013 compared to 2012 and 2011. The drop off is widely attributed to tighter FHA lending requirements, as well as a decline in first-time homebuyers.
Relaxing the timeout period gives the FHA a “bigger net” to cast for borrowers, Davis said.
“We’re possibly looking at a sizable amount of borrowers, and it comes at a good time in terms of affordability,” said Davis, president of the Savannah Area Board of Realtors. “Nobody dreams of renting. Everybody dreams of owning.”
A larger borrower pool should also benefit the FHA. The agency’s reserves are projected to post a nearly $1 billion shortfall this year, and new loans generate underwriting fees, as well as mortgage insurance premiums. The FHA raised its mortgage insurance premiums earlier this year.
The local industry insiders do not anticipate the FHA’s thirst for new business to result in the lending mistakes that contributed to the reserve losses.
“I don’t believe that will happen again,” Davis said. “There are now checks and balances within the underwriting process and in terms of appraisals and everything else. This program will help good borrowers.”
FHA MORTGAGE ELIGIBILITY CHANGES
Effective Aug. 15, the Federal Housing Administration is allowed consideration of borrowers who experienced “economic events” that resulted in foreclosure, short sale or deed-in-lieu. Applicants must be able to document that:
• Credit impairments were the result of a loss of employment or a significant loss of household income beyond the borrower’s control.
• The borrower has demonstrated a full recovery from the economic event.
• The borrower has competed housing counseling
• The borrower has no history of delinquency on rental housing payments.
• The borrower has no more than one 30-day delinquency on payments due to other creditors.
• The borrower has no collection accounts.
An “economic event” is defined as any occurrence beyond the borrower’s control that results in loss of employment, loss of income or a combination of both, which causes a reduction in the borrower’s household income of 20 percent or more for a period of at least six months.