Apr152015

Stunning proof boomerang homebuyers do not exist

Data shows very few recent mortgage originations were from borrowers with a previous foreclosure.

boomerang_buyer

Over the last several years, the financial media periodically runs stories about the return of boomerang buyers, those who lost their homes in foreclosure but bought again. From the beginning I flatly stated this group would not participate in the housing recovery, and they would not be a significant source of demand. In the most complete study conducted on the behavior of boomerang buyers, the authors concluded that “Only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default.”

So why did so many analysts think it would be different after the housing bust? Most housing analysts believed the housing bust hurt ordinary people who would want to own again and dutifully make payments if given the chance. While such stories of American redemption are noble and appeal to our collective sense of pride, it ignores some inconvenient facts of human behavior.

First, people who experience the trauma of losing their homes in foreclosure aren’t eager to try again: once bitten, twice shy. For many people the American Dream turned out to be a nightmare, and they simply don’t want to risk the pain of loss again.

check-out-of-american-dream

Second, many people who became homeowners during the 00s learned very bad financial management habits; many were Ponzis. Many people who bought homes did so with no money down, so they never mastered the financial discipline of saving — an essential prerequisite to maintaining home ownership.

Further, many also learned to borrow and spend the appreciation from their homes and manage personal Ponzi schemes. Not just didn’t this group learn to save, they actually learned how to create an empire of debt to live well beyond their means, and they did so by securing debt against their homes, which they ultimately lost.boomerang_missed

Given the poor financial management skills of many who lost their homes in foreclosure, it shouldn’t be too surprising this group didn’t suddenly acquire the discipline of saving and rebuild their credit scores and put themselves in a position to buy again even if they had the desire — which many didn’t.

During the housing bust millions of people lost their homes, more than one million alone in California. With the millions of people who lost their homes, it would take almost 500,000 boomerang buyers just to get up to the 10% level observed in the federal reserve study. Since saving for a down payment takes time, most boomerang buyers will use FHA financing. So how many FHA buyers had previous foreclosures?

Lenders originated just 2,162 FHA mortgages in the year through September 2014 for buyers with a previous foreclosure, according to the FHA. That was up slightly from 1,808 in the same period in 2013.

So in a nine-month period in 2013, only 1,808 boomerang buyers purchased using FHA financing, and in 2014 during the same nine-month period, only 2,162 boomerang buyers materialized.misfortune_teller

This is proof the boomerang buyer meme is dead and should be buried.

After Foreclosures, Home Buyers Are Back

As their credit improves, borrowers who defaulted get reprieve

By AnnaMaria Andriotis, Laura Kusisto and Joe Light, April 8, 2015 8:17 p.m. ET

The housing industry is slowly seeing the return of buyers like Rick LeBlanc, who lost his Michigan home to foreclosure during the financial crisis but now qualifies for a mortgage again.

Mr. LeBlanc, a 46-year-old residential-construction manager, fell behind on his $1,400 monthly mortgage payments in 2007 after suffering a 20% pay cut. He had tried to sell the property before moving to Florida for a new job. With no takers, he took on renters. But with $225,000 owed on the Highland, Mich., property, he and his wife eventually lost it to foreclosure in 2008.

I wonder how long he skimmed the rent before the foreclosure?

durkin

In the years since, Mr. LeBlanc says he was turned down for car loans and credit cards. His credit ruined, he learned to live without debt and to pay for his family’s expenses with cash. …

What a wonderful consequence! He tasted true financial freedom, the best outcome I can imagine for him. Obviously, the reporter is portraying this a bad thing, but the circumstances imposed a discipline on this family that would accrue long-term benefits if they maintained the good financial management habits after they regained their ability to borrow.

More than five million American families lost their homes to foreclosure between 2007—the year when the crisis kicked up—through the end of last year.

Some analysts were predicting as many as 80% of these former owners would buy again. Even the more conservative predicted 50%. I don’t see the number rising higher than 10%, just as the federal reserve noted in their study.HELOCs_for_the_homeless

Foreclosures and most negative credit events stay on credit reports for up to seven years. For those who lost their homes in the early years of the crisis, credit scores are improving as the black marks drop away, improving their ability to borrow again. This could have widespread implications for the U.S. economy, including a boost in demand for mortgages in the coming years. …

While it’s true that negative information stays on a credit report for years, the FHA isn’t near so stringent, so if boomerang buyers were to return, the FHA numbers would be the first to show signs of recovery, which they aren’t.

Many foreclosed-on borrowers opt for loans backed by the Federal Housing Administration, which allows such buyers to come back in as little as a year under some circumstances.

If FHA will allow buyers to obtain an FHA loan in as little as one year, why aren’t we seeing more FHA loans to boomerang buyers? bullshit

“We have a large number of people who were affected by foreclosure and have been sitting in the penalty box,” says Mike Orr, director of the Center for Real Estate Theory and Practice at the W.P. Carey School of Business at Arizona State University. “This ‘boomerang buyer’ group is a pretty substantial potential demand.”

Obviously, the above statement is bullshit.

Many folks who become eligible for a mortgage still won’t qualify due to other problems on their credit report, such as late credit-card payments or delinquent auto loans, which can also drag down scores.

This is a more likely problem. Perhaps the strategic defaulters maintained a high credit score other than their mortgage default, but most of the rest defaulted on mortgage loans, car loans, credit cards, and every other loan when their Ponzi schemes unraveled.

And many foreclosed-upon borrowers remain too shellshocked to consider homeownership again.

A reasonable reaction considering what happened.

american_dream-foreclosure

Lenders originated just 2,162 FHA mortgages in the year through September 2014 for buyers with a previous foreclosure, according to the FHA. That was up slightly from 1,808 in the same period in 2013.

Obviously, boomerang buyers are not back, and realistically, 90% of them never will be.

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