Will Lenders Take Foreclosed Owners Back?
April 10, 2015
Home owners who lost their home to foreclosure during the financial crisis are now trying to step back into home ownership. But a critical question remains: Will mortgage lenders take these ex-owners back, and will they qualify for a mortgage?
The Comeback Buyers
The number of "boomerang buyers," as they’re known, is potentially huge: More than 5 million American families lost their homes to foreclosure between 2007 through the end of last year. Foreclosures stay as a blemish on credit reports for up to seven years, which means many of these ex-owners are just starting to re-emerge.
But not all lenders are welcoming these boomerang buyers back.
Many bank giants faced huge losses from defaulting borrowers during the housing crisis and then also were hit with high-dollar mortgage-related penalties from government regulators. As such, lenders like Bank of America Corp. and J.P. Morgan Chase & Co. have reportedly been pulling back on their mortgage lending, keeping tight credit requirements in place to ensure only the safest borrowers qualify, The Wall Street Journal reports. Their tight credit requirements, which include high credit scores and nearly blemish-free credit histories, could sideline former foreclosed buyers longer.
On the other hand, some mortgage lenders want to give these ex-owners a second chance. For example, Wells Fargo & Co. and SunTrust Banks Inc. have reportedly started to ease credit, and smaller lenders "which for the most part hadn't faced the penalties, have taken advantage of big banks' reticence, opening the spigot to qualified but less creditworthy borrowers in an effort to gain market share," The Wall Street Journal reports.
Some mortgage companies view the boomerang buyers as a big opportunity to ramp up business. Anthony Hsieh, chief executive of loanDepot LLC, says that one out of four of the company's current Federal Housing Administration borrowers has had either a foreclosure or bankruptcy in the last seven years. Loans backed by the FHA allow some ex-owners to re-enter home ownership sooner, sometimes after a year of a foreclosure under some circumstances.
But qualifying will still remain a challenge to many boomerang buyers. Most mortgage lenders, in general, require FICO credit scores in qualifying for a mortgage of at least 620 to 660 (FICO credit scores overall range from 300 to 850). About 12 percent of the number of people who had a foreclosure on their credit reports between October 2007 and October 2008 had a FICO credit score of at least 680 by October 2014. That is up from 6.2 percent in October 2012 and 4.4 percent in October 2010, according to an analysis by Fair Isaac Corp.
The extent that mortgage brokers welcome boomerang buyers back still remains uncertain. But some say they are acting cautiously to make sure the market doesn’t repeat past mistakes. After all, boomerang borrowers could prompt another wave of bad loans in the future because those who have previously gone through a foreclosure may be more likely to do it again, argues Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J.
Source: "After Foreclosures, Home Buyers Are Back," The Wall Street Journal (April 8, 2015)
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Updated: February 15, 2019