We’d all like to see fewer housing foreclosures. A lower number of foreclosures would provide an additional boost to the residential housing market. This would then provide a boost to the economy in general. And that, of course, would be a boon to the commercial real estate industry.
It’d also help if consumers who did lose their homes to foreclosure thanks to the recession were able to purchase a new home in a shorter amount of time. That would widen the pool of potential homebuyers and would provide yet more fuel to a housing market that is already in the middle of a solid recovery.
The Obama administration recently enacted a rules change in the hopes of doing just that. The new rules allow certain borrowers who have lost their homes to foreclosure or declared bankruptcy to qualify for a mortgage loan backed the by Federal Housing Administration after as little as one year.
Before the rules change, borrowers had to wait at least three years after suffering a foreclosure to apply for a mortgage loan insured by the FHA. Private lenders followed — and still follow — their own guidelines, with many requiring borrowers to wait at least seven years before they approve them for a mortgage loan. Fannie Mae, the federally chartered corporation, requires that borrowers wait seven years after a foreclosure before taking out a loan serviced or guaranteed by it.
So what impact will the new rules change have? Will it help boost the number of U.S. residents able to buy a home?
Don Frommeyer, president of the National Association of Mortgage Brokers, said in a phone interview that he expects the rules change to have a positive impact, although that impact won’t suddenly swell the ranks of home buyers.
“It will generate some interest. But it won’t triple or quadruple the number of people who buy a house,” Frommeyer said. “It’s not a saviour program. It’s just one more added tool to help the housing market and the economy.”
There are critics of the rules change. Some worry that the FHA will be insuring loans to consumers who because of their past financial problems might not be homeowner material.
But Frommeyer said that those fears are misplaced. Lenders will look at extenuating circumstances before passing out FHA-insured loans, he said. How many homeowners fell into foreclosure because they lost their jobs and their income for half a year or longer? What if these same people had perfect payment records and high credit scores before their job losses? Should these people have to wait three years or more to apply for a mortgage loan after they’ve found new jobs and have reestablished their savings?
“There are a lot of times when something tragic happens to people,” Frommeyer said. “Sometimes these people are able to get back on their feet before three years time passes. The purpose is to help them out.”
The process also won’t be one that moves too quickly, Frommeyer said. The new rules allow buyers to apply for mortage loans within one year of losing a residence to foreclosure. But realistically, the process will rarely be such a quick one. Buyers must first reestablish credit scores solid enough to allow them to qualify for a mortgage loan. Buyers who’ve lost a home to foreclosure — and missed the mortgage payments to allow that to happen — will have severely damaged credit scores by the time the foreclosure finally happens. It will take these borrowers at last a year to repair that credit to the point where they can qualify even for a loan with higher interest rates.
It will still take at least 12 to 15 months for buyers, then, to be able to realistically apply for a mortgage loan, Frommeyer said. The rules change, then, might shave off about a year’s wait for certain buyers.
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