Buyers Back After Foreclosure

The Wall Street Journal

15 October 2012

‘Boomerang’ Home Seekers Become Eligible for Mortgages and Hit Market Again

Millions of families lost their homes to foreclosure after the housing crash hit six years ago. Now, some of those families are back in the housing market. Call them the “boomerang” buyers.

It is difficult to quantify the exact number of boomerang buyers, but real-estate agents, mortgage brokers and home builders all say a significant number of new buyers are families and individuals who went through foreclosure as recently as three years ago, the time period that buyers who defaulted on a mortgage must typically wait before becoming eligible for a mortgage backed by the Federal Housing Administration.

On a recent conference call with investors, Stuart Miller, chief executive of Miami-based home builder Lennar Corp., said the company was seeing more people “coming out of the penalty box.” At Cornerstone Communities, a San Diego home builder, roughly 20 of the 110 closings they have had this year came from buyers who have been through a foreclosure or short sale, estimates Ure Kretowicz, the company’s chief executive.

“It’s more than incremental business, that’s for sure,” adds Dan Klinger, president of K. Hovnanian American Mortgage, the mortgage arm of builder Hovnanian Enterprises Inc. With growing interest from these formerly delinquent buyers, K. Hovnanian provides its sales staff with a flier with industry guidelines listing the mortgage-eligibility rules for all types of derogatory events, from foreclosure to bankruptcy filings. “The industry is saying, ‘Pay your dues and then get back into the market,’ ” Mr. Klinger says.

Using the three-year benchmark it takes to get an FHA-guaranteed loan, in this year’s second quarter there were 729,000 households that were foreclosed upon during the bust that are now eligible to apply for an FHA mortgage, up from 285,000 in the second quarter of 2011, according to an analysis of foreclosure data by Moody’s Analytics. The company projects that number will grow to 1.5 million by the first quarter of 2014.

Typical boomerang buyers are people like April Del Rosario, who purchased her first home in 2006 when she was 24 years old. Newly married and unsure of what terms such as adjustable-rate mortgage meant, Ms. Del Rosario and her husband paid $315,000 for a two-bedroom condominium in San Diego’s Mission Valley area, a location they picked because it was central to their jobs. The $2,600 monthly mortgage payment was already a struggle, but when the mortgage rate was adjusted higher and Ms. Del Rosario became pregnant, the couple was overwhelmed. They lost the home to foreclosure in 2009.

“We were really young and stupid,” she says. “All of a sudden, our already really expensive mortgage was going to go up. I was pregnant and everything was just bad timing on our part.”

Three years later, the couple is back in the market. The Del Rosarios were recently approved for a loan for a $280,000 home in Chula Vista, south of San Diego, which, when it is completed in January, will have three bedrooms and a two-car garage. Instead of proximity to work, they picked the location based on its school district and their desire to live there a long time. And while they now must pay $300 a month in mortgage insurance, the family’s income has grown, and their total mortgage payment is still a little lower than before, around $2,400. “We’re trying to be really conservative. We just want to have a nice place for our son,” she says.

There is a web of rules for when and how people who have lost homes to foreclosure or short sales or have gone through a bankruptcy can become eligible for a new mortgage. It typically takes three years after a foreclosure or short sale for a buyer to qualify for an FHA-backed loan. In many cases, it takes just one year after a Chapter 13 bankruptcy discharge, according to the agency.

Fannie Mae or Freddie Mac require a wait period of as much as seven years after a foreclosure or short sale before a consumer can become eligible for a conventional mortgage, though some short sellers can purchase again after as little as two years.

Becoming eligible for a new mortgage doesn’t mean that buyers will necessarily qualify for one. Lenders still require borrowers to have strong credit score and to have been paying their other bills on time.

Until recently, many of the people who had lost their home to foreclosure or short sale have rented homes, leaving many economists and industry watchers to wonder if the nation would become more of a renter society. In the second quarter, the national home-ownership rate came in at 65.5%, down from 65.9% a year earlier and 69.2% in the second quarter of 2004. Each percentage-point decline represents about one million households.

But as rental rates continue rising—they climbed 0.8% in the third quarter to a national average of $1,090 per month, according to Reis Inc. — homeownership is increasingly becoming cheaper than renting.

That is part of what enticed Ronda Martinez, 39, back in to the market. In 2007, she and her husband, Mark, let their two-story, $430,000 home in Perris, Calif., go into foreclosure when they were unable to sell it when required to move to Phoenix for a job.

Later, in 2010, she was laid off from her job at a real-estate-data company.

Since then, the family has repaired their finances, and Mrs. Martinez found a new job. This month, the family is closing on a $150,000 home in Phoenix that has five bedrooms and a pool in the back.

“Initially people are upset and think, ‘I’ll never buy again,’ ” she said. But “there’s no reason to give up on owning.”