“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.”, Tara Siegel Bernard, “Years After the Market Collapse, Sidelined Borrowers Return”, New York Times
“It’s not the mortgage lender’s fault that Tracy S. decided to divorce her husband (and probably not her fault either)!!!!! The mortgage lender/investor is a neutral party here and could easily lay claim to being an innocent victim. As I have said before on this blog, I recall from my years in the mortgage industry, that in normal times roughly 5% of American homeowners (with a mortgage) are forced to sell their home each year because of job loss, death, illness, divorce, or some other serious personal matter. In normal times, these “forced sales” occur without notoriety or loss to the mortgage lender/investor, because the homeowner/borrower has sufficient equity (mostly from nominal home price appreciation, not down payments or principal payments). The unfortunate reality is that most of the mortgage loans made during the housing bubble (and later bust) have or had negative equity; the mortgage exceeded the home’s value (net of sales costs). As a result, these largely hidden personal tragedies (5% or so a year in normal times) have come forward in droves given the size of the housing bust and market, and have been improperly blamed on the mortgage lender.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Years After the Market Collapse, Sidelined Borrowers Return
Tammy and Mike Trenholm in their Atlanta home. The couple 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. Credit Tami Chappell for The New York Times
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.
The Trenholms’ home. Credit Tami Chappell for The New York Times
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.)
Deb Klein of Cobalt Mortgage, says 10 to 15 percent of the loans she closes are to people with distressed home sales in their recent past. Credit Samantha Sais for The New York Times
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.”
Tammy Trenholm and her daughter Shea, 12. Credit Tami Chappell for The New York Times
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.”
A version of this article appears in print on October 23, 2014, on page B1 of the New York edition with the headline: A Second Try at Home-Buying