The desire for home ownership is stronger than ever. There are many emotional reasons to covet home ownership, and these are valid reasons to buy a house. However, over the last 30 years, the desire to own a home for family and security has been darkened and twisted by the desire to make outsized profits on imagined appreciation. Although would-be buyers who are prudent and conservative were shaken by the collapse of housing prices, the Ponzis benefited greatly from the price volatility, and their desire for real estate has grown. The moral hazard of the housing bust and bailouts has ensured the Ponzis will want another crack at it, and now the FHA is giving loans to Ponzis to reenter the housing market.
… These so-called, “strategic defaulters,” some of them investors and some owner-occupants, are coming back to the market, despite damaged credit, and apparently the market is welcoming them back.
A new survey of past clients by YouWalkAway.com, a website that assists borrowers in the legal pitfalls of strategic default, found that nearly 80 percent expressed a desire to buy a home again within the next twelve months.
Desire is not demand. They may want back in, but most won’t have the credit score or the down payment necessary to get back in. It’s poetic justice that delinquent mortgage squatters will miss the recovery rally.
It also cites data by Moody’s analytics, showing that the number of eligible home buyers who have had a previous foreclosure will be 1.5 million by the first quarter of 2014.
Crashing home prices and sketchy mortgage products caused millions of Americans to default on their loans and eventually lose their homes. For some, it was a tragic fight to the end to keep their single largest investment; for others it was a conscious decision to walk away from their mortgage commitments, given the real fact that they would likely not see home equity again for many years to come.
Some saw this as morally reprehensible, others as a sensible business decision.
… Coming back to home ownership may not be as difficult as some think. Consumers who only defaulted on their mortgage during the recent recession were far better risks than those who went delinquent on multiple credit accounts, like credit cards and auto loans, according to a 2011 study by TransUnion.
“There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit in the study release. “This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.”
People who strategically defaulted on their loans are probably good credit risks, particularly those that kept their other debts current. For them default was the wiser financial choice. It shows they have superior financial analysis skills.
(Read More: Americans Are Using Their Houses as ATMs Again)
Not surprisingly, given this potential, YouWalkAway.com is launching the “AfterForeclosure.com Pass/Fail App,” which claims to tell potential borrowers in just one minute, “if they have a shot at home ownership.”
“We want people to know that it’s possible and, in a lot of cases, it’s advantageous,” says Jon Maddux, former CEO and co-founder of YouWalkAway.com.
If you want to check out this new site, please click below.
It is possible, but mortgage underwriting is far more strict today than during the housing boom, and there are varying waiting periods before former homeowners who went through foreclosure can qualify for a new loan. The Federal Housing Administration, the government insurer of home loans which now backs just over 20 percent of new loan originations, requires a three-year wait. Fannie Mae and Freddie Mac, which own or guarantee the bulk of the remaining new loan originations, require up to seven years for a strategic defaulter to qualify again for a mortgage.
There should be a waiting period, and these buyers should not be given access to low down payment loans. They’re a proven credit risk, and with no skin in the game, they won’t hesitate to default again if the market turns south. Strategic default may have been the best option available to them, but there still needs to be consequences for doing it.
Most former owners don’t buy again
Despite the “feel good” stories like the one that follows, statistically less than one third of those who went through foreclosure ever come back to the housing market. From Pent-up demand from boomerang buyers may not materialize:
A big part of the bullish sentiment toward real estate is the believe that former owners who lost their houses in foreclosure will return in droves to mop up the supply of shadow inventory and push prices higher. … A recent study from the federal reserve suggests this may be the case. Almost 75% of those who lost their homes to foreclosure may never return. … Indeed, 12 years after a termination, just above 35% of borrowers with no prior defaults have taken out new mortgages. … Only about 10% of those who terminated their mortgages through default — which means both short sales and foreclosures — return to the market within 12 years.
By JEFF COLLINS / ORANGE COUNTY REGISTER — Published: Feb. 15, 2013 Updated: 6:46 p.m.
Andreea Stucker thought she made a good investment when she bought a Huntington Beach condo with her boyfriend in December 2005.
But then she and her boyfriend split up. He moved out just as the housing market crashed, leaving Stucker broken hearted and broke.
With her own income down at least 60 percent, the real estate agent was unable to make the $4,400-a-month mortgage payments on her own, even after taking in room-mates.
A real estate agent who thought a condo was a good investment in 2005. I’m having trouble suppressing my giggles.
“I begged the bank for over seven months to grant me a loan modification to reduce my payments, because I was rapidly going through my savings,” Stucker, 34, recalled.
“I ended up completing a short sale on my home, and my credit took a huge hit.”
Three years later, Stucker has mended both her heart and her credit score. She has a new husband and, “miraculously,” a new house.
Stucker is among the emerging ranks of boomerang buyers — people who bounce back from foreclosures or short sales to become homeowners again.
Generally, buyers must wait at least three years after a foreclosure or short sale to qualify for a government-backed Federal Housing Administration mortgage. It can take seven years to get a conventional loan backed by Fannie Mae or Freddie Mac.
It’s been 4 1/2 years since the foreclosure crisis peaked, and real estate industry observers say they have seen boomerang buyers gradually returning to the Orange County market for at least a year.
“I think over three-fourths of these folks will take a stab at the comeback trail,” said Paul Scheper, division manager for Greenlight Financial in Irvine. “Even though some are coming off a bitter experience, most will be looking to regain the American Dream.”
Did he make that up? This is not particularly responsible reporting. The main takeaway most readers will get from this article is that boomerang buyers are returning to the market in large numbers based on the statement from the “expert” above. A little research would have exposed his statement as unsubstantiated fantasy. The authoritative study on the matter, Credit Access Following a Mortgage Default, clearly shows that nowhere near three quarters come back. About one quarter to one third ever successfully buy again.
Three to five people who went through a foreclosure or short sale show up each month at the Credit Counseling Service’s homeownership courses in Santa Ana and Irvine, or up to 20 percent of the attendees, said Sahara Garcia, the agency’s director of education. She first noticed the boomerangers in late 2011.
“They’re out there,” Garcia said.
Personally, I believe there is intelligent life in outer space too, but that doesn’t mean they’ll stop by for a visit or that they’re looking for a new home.
For each boomerang buyer there are two or three that never come back.
Kicked when you’re down
After 3 ½ years, Stucker still cries at the memory of losing her Huntington Beach condo.
She and her ex-boyfriend paid $613,000 with no money down
It’s an oxymoron to claim someone paid with no money down. She “paid” nothing. She rented money to be on title so she could get more free money if prices went up and dodge responsibility if prices went down. It was a win-win for her.
for a two-level condo with cathedral ceilings and skylights, two bedrooms, two bathrooms and a spacious loft less than two miles from the beach.
They spent $40,000 more installing granite countertops, hardwood and travertine floors, new bathroom vanities recessed lighting and other upgrades.
They got a HELOC to pimp the place out to their liking.
What astonishes me is that people believed the system was supposed to work this way. How can people get free houses, then have the house pay for its own renovation costs to suit the buyers tastes? Doesn’t that sound a little too good to be true? Shouldn’t common sense kick in at some point and say “this is going to end badly?” In my opinion it takes willful ignorance to participate in a mania like that.
But it turns out that the real estate game isn’t just about location, location, location. It’s also about timing. …
(Please see Timing the housing market is important)
It shouldn’t be about timing. If we had stable house prices, if we didn’t inflate housing bubble and stoke these manias, then timing wouldn’t matter at all. Unfortunately, that’s not the world we live in.
“It was probably nine months that I fought for that home,” Stucker said. “I loved my house, and I wanted to stay.”In hindsight, she says she should have cut her losses before dipping into her savings.
But she kept thinking the market would turn around, and she’d be able to afford the home again.
Delusion and denial are every loanowners best friends.
“It’s like getting kicked when you’re down,” Stucker recalled. “You’re going through this awful breakup with this person you thought you had a future with, (and) your income is crap even though you’re working full time. … It was tough.” …
Because of the experience, Stucker thinks she’s a better real estate agent.
Clients going through their own short sales worry they’ll never be able to buy a home again. She knows what they’re going through, emotionally and financially, and shares her experience.
“In retrospect, it was a mistake to buy a house with no money down at the height of the market. But who knew it was the height of the market?” Stucker said.
I did. And I tried to warn as many people as I could. Mass ignorance and delusion is no excuse.
“(But) no matter how far you’ve fallen, there’s always up. There’s always the possibility that you can own again.”
Let’s just hope there is no possibility that people will be given free houses to pimp out as they wish on taxpayer-backed loans.
I have met with Jon Maddux of YouWalkAway.com, and he emailed me regarding his new site AfterForelosure.com. The site walks prospective borrowers through a series of qualifying questions and sends back a report detailing what remedies they need to take, if any, to qualify for a loan again. It’s a good site, and anyone who is in those circumstances should check it out. (see link below).
Banks are testing the waters
Each week when I search for properties to profile, I first check the new foreclosures on the market. Despite the huge backlog of delinquent loans, lenders are only processing about 25 to 30 properties per week. They will be at this forever.
One of the things I take note of is the number of properties at various price points. For most of 2011 and 2012, banks rarely foreclosed on anything over $800,000. They knew there was no retail market for jumbo loan properties, so they just let those people squat.
In January of 2013, I saw almost no properties over $1,000,000, then in February I noticed a change. Banks stopped foreclosing on the fringe of the jumbo market, the $800,000 to $1,200,000 range, but they started processing high-end foreclosures. These still hit the market with large discounts, but lenders must believe there is enough demand to sell a few. Today’s featured property has been lingering on the banks books since early 2011.
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Proprietary OC Housing News home purchase analysis
$2,100,000 …….. Asking Price
$1,764,000 ………. Purchase Price
3/28/2011 ………. Purchase Date
$336,000 ………. Gross Gain (Loss)
($168,000) ………… Commissions and Costs at 8%
$168,000 ………. Net Gain (Loss)
19.0% ………. Gross Percent Change
9.5% ………. Net Percent Change
9.1% ………… Annual Appreciation
Cost of Home Ownership
$2,100,000 …….. Asking Price
$420,000 ………… 20% Down Conventional
4.19% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,680,000 …….. Mortgage
$459,381 ………. Income Requirement
$8,206 ………… Monthly Mortgage Payment
$1,820 ………… Property Tax at 1.04%
$917 ………… Mello Roos & Special Taxes
$525 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$400 ………… Homeowners Association Fees
$11,867 ………. Monthly Cash Outlays
($1,487) ………. Tax Savings
($2,340) ………. Equity Hidden in Payment
$628 ………….. Lost Income to Down Payment
$283 ………….. Maintenance and Replacement Reserves
$8,951 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$22,500 ………… Furnishing and Move In at 1% + $1,500
$22,500 ………… Closing Costs at 1% + $1,500
$16,800 ………… Interest Points
$420,000 ………… Down Payment
$481,800 ………. Total Cash Costs
$137,200 ………. Emergency Cash Reserves
$619,000 ………. Total Savings Needed