Oct222013

Lenders unwilling to loan to wealthy strategic defaulters, hoocoodanode?

Actions have consequences — which is not to say that many bailout advocates want everyone to avoid these consequences — but in the real world, the decisions we make impact our lives. When rational people make good decisions, they carefully consider the potential consequences of their actions. Bailouts that soften these consequences invariably leads to more high-risk behavior, poor decision making, and an increased sense of entitlement.

I was an early advocate of strategic default, and as it turned out borrowers who strategically defaulted early on made the best choice. These early strategic defaulters recognized their shortest path to future home equity was to quit paying, wait the necessary penalty period, then buy again when prices were lower. Those that defaulted from 2007-2009 waited two years, then repurchased in 2010 to 2012. It worked out very well for them. The key point here is that those who strategically defaulted knew they were going to have to wait until they could buy again, so by defaulting early, they started their waiting clock at the earliest possible time. Those that default later risked missing the recovery rally, which came earlier than most expected.

When I first read today’s featured article, I was shocked at the sense of entitlement displayed by the whiners profiled in the article. The main protagonists are a couple who strategically defaulted, but now they are complaining that they have to wait. Perhaps common sense is too much to ask of these people.

Foreclosure Haunts Next Home Purchase

Affluent home buyers attempting to get back into real estate after defaulting on their home loan are finding that few lenders are willing to work with them.

AnnaMaria Andriotis — Oct. 17, 2013 4:42 p.m. ET

Jumbo borrowers who went into foreclosure a few years ago are learning the hard way: You can’t go home again.

Affluent home buyers attempting to get back into real estate after defaulting on their home loan are finding that few lenders are willing to work with them. Those that do often impose long waiting periods, higher down payments and higher interest rates.

Since these borrowers have proven they will bail out and leave the lender with enormous losses, shouldn’t lenders be more cautious and charge them higher rates? It’s no different than auto insurance companies charging higher rates to drivers who’ve been in several accidents.

Since spring, lenders say they have increasingly been hearing from would-be buyers who went through foreclosure. “We get the calls routinely,” says Al Engel, executive vice president at Valley National Bank, based in Wayne, N.J.

Callers include self-employed borrowers whose income dropped during the recession, causing them to fall behind on their mortgages, but who have since financially recovered. Also affected are borrowers who walked away from their homes after their values plummeted and owed more on their mortgage than the house was worth. Now that home values have stopped falling in most housing markets, they want back in.

Rising house prices are also the best cure for strategic default. Very few borrowers strategically defaulted over the last 18 months because rapidly rising prices gives them hope of equity again. This is also what motivated many long-term delinquent borrowers to accept a loan modification and start paying again. Don’t underestimate the psychological impact of rising house prices.

Terri Conrad and her husband saw their 4,500-square-foot, five-bedroom home in Carbondale, Colo., foreclosed on last year. They purchased the home for $1.25 million in 2007, but its value had dropped to roughly $700,000 by 2012. Ms. Conrad, who manages finances of affluent families, says the couple tried refinancing but was denied. Although they could afford the payments, they decided to walk away because they didn’t want to keep paying for a home that was worth significantly less than the loan. They are now renting in Houston and plan to wait at least a couple of years before applying for a home loan again. “I’m worried about who’s going to give me a mortgage,” she says.

This couple is quite a piece of work. First, as a financial adviser, shouldn’t she have known there would be consequences for her actions? Based on her behavior and her ignorance toward the consequences, what affluent family would trust her advice on financial matters? Being quoted in this article this way can’t be good for business.

Most lenders who offer private jumbo mortgages, which start after $417,000 in most parts of the country and at $625,501 in pricier housing markets, remain very selective and limit themselves to borrowers with the strongest credit profiles.

As they should be. This is private capital assuming all the risks. These loans are not backed by the US taxpayer who now guarantees all future bailouts of housing.

Foreclosures stay on credit reports for seven years from the time homeowners default on their mortgage. What’s more, a foreclosure can lower a borrower’s credit score by 100 points, says John Ulzheimer, a former manager at FICO, the credit score used by most lenders. Borrowers who were previously always on time with payments would see a bigger drop. For instance, someone with an 820 FICO score (FICO scores range from 300 to 850) could drop to 580 following foreclosure, he says. That borrower could need more time to work his or her way back to a top score before getting a mortgage.

Nobody is enduring 240 point FICO score drops. That is bullshit scare tactics to prevent future strategic defaults. Polls of clients from youwalkaway.com noted ” Credit-scoring firm FICO estimates that someone with a 680 score would see that number sink between 85-100 points after a strategic default, and someone with 780 could crater 140-160 points.” The difference between the 580 reported in the article and 640 of reality is the difference between meeting an FHA loan threshold or not. Plus, during the waiting period, borrowers who don’t miss payments see their FICO scores quickly recover.

Separately, many affluent borrowers went into foreclosure later largely because they were able to tap their savings to pay their mortgage. Foreclosures on homes worth over $1 million peaked in 2011, while foreclosures on homes worth less than $1 million peaked in 2009, according to RealtyTrac, which tracks real-estate data. By delaying foreclosure, they will likely have to wait—possibly until after housing has fully rebounded—to get a home loan.

This is something I argued from the start, and it’s why borrowers who strategically defaulted early on made the best choice.

Borrowers who intentionally default—the ones who walked away from their homes—are less likely to be approved for another mortgage soon after. Lenders that originate private jumbos often follow guidelines set by Fannie Mae and Freddie Mac, which require strategic defaulters to have re-established their credit profile for at least seven years after foreclosure in order to get a mortgage.

This is factually incorrect, but lenders won’t complain about the bad information. Back in 2010, the GSEs changed their waiting period to only two years. In 2012, FHA waived its 3-year waiting period. Many private lenders have more stringent waiting periods, but the GSEs and FHA do not.

But experts say more flexibility among lenders could emerge in the next year. A recent change allows certain borrowers to become eligible for mortgages backed by the Federal Housing Administration in as little as one year after their foreclosure. Previously the waiting period was at least three years. “This may be an influence on the private lenders to loosen a little bit on their waiting period,” says Daren Blomquist vice president at RealtyTrac.

It won’t influence private lenders at all. It was a stupid move on the part of politicians and bureaucrats who are failing to protect the US taxpayer.

Borrowers who overcame a financial hardship that was out of their control and improved their credit profile and are shopping for a mortgage should consider smaller lenders. Valley National Bank and Fremont Bank, which is based in the San Francisco Bay area, say they are open to working with some private jumbo applicants in as little as 2½ to three years, respectively, after the date of foreclosure.

More issues to consider in seeking a mortgage:

• Cash reserves. The banks willing to work with these borrowers require large down payments, ranging from at least 25% to 50%, and savings that equal at least three months of mortgage payments.

• Detailed screening. Lenders will often require a lengthy conversation with applicants to figure out the circumstances that led to their foreclosure.

• Higher interest rates. Some lenders say if they do approve these applicants, they are likely to charge higher interest rates to compensate for the extra risk they are taking on.

The people who strategically defaulted and squatted for years got to enjoy a substantial benefit at the bank’s expense. These people should have to endure some consequences for this action. The waiting period is a small price to pay for the good times they had while they enjoyed their free ride.

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[idx-listing mlsnumber=”OC13210996″ showpricehistory=”true”]

3217 South SALTA St Santa Ana, CA 92704

$439,900 …….. Asking Price
$177,000 ………. Purchase Price
3/31/1995 ………. Purchase Date

$262,900 ………. Gross Gain (Loss)
($35,192) ………… Commissions and Costs at 8%
============================================
$227,708 ………. Net Gain (Loss)
============================================
148.5% ………. Gross Percent Change
128.6% ………. Net Percent Change
4.9% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$439,900 …….. Asking Price
$15,397 ………… 3.5% Down FHA Financing
4.24% …………. Mortgage Interest Rate
30 ……………… Number of Years
$424,504 …….. Mortgage
$117,533 ………. Income Requirement

$2,086 ………… Monthly Mortgage Payment
$381 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$92 ………… Homeowners Insurance at 0.25%
$478 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,036 ………. Monthly Cash Outlays

($495) ………. Tax Savings
($586) ………. Principal Amortization
$23 ………….. Opportunity Cost of Down Payment
$130 ………….. Maintenance and Replacement Reserves
============================================
$2,108 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,899 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,899 ………… Closing Costs at 1% + $1,500
$4,245 ………… Interest Points at 1%
$15,397 ………… Down Payment
============================================
$31,440 ………. Total Cash Costs
$32,300 ………. Emergency Cash Reserves
============================================
$63,740 ………. Total Savings Needed
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