A New Lifeline For Would Be Home Buyers

September 09, 2013

A New Lifeline For Would-Be Home Buyers

The Obama administration is trying to create a mortgage market that is more forgiving to all the borrowers who lost their homes due to the recession, in a effort to widen the pool for potential home owners.

With a recent rule change which lets borrowers who have gone through a foreclosure, bankruptcy or other adverse events, but who have repaired their credit, they are becoming eligible to receive a new mortgaged backed by the Federal Housing Administration after waiting a year. Previously the borrowers had to wait at least three years before one could qualify for a new government-backed loan. 

To be eligible for the FHA loans, the borrowers must show that their foreclosure or bankruptcy was cause by a job loss or reduction in income that was beyond their control. Borrowers also must prove their incomes have had fully recovered and complete the housing counseling before getting a new mortgage. 

It isn’t quite clear if banks will be as eager to offer loans with the new terms at a time when they are facing a wave of lawsuits, and investigations related to other government-backed loans. The FHA already offers among the most flexible lending standards today, requiring down payments of just 3.5%

The policy change reflects broader concerns among administration officials and federal regulators that the mortgage credit pendulum has swung too far to the restrictive side from the days of lax lending rules that fueled the bubble. Some economists are stating that the too strict credit standards are shutting out some creditworthy borrowers and holding back economic growth.

The new rules, which expire in three years also apply to former home owners who have completed a short sale, where a bank approves the sale for less than the amount owed.

In the four years ended last September, some 3.9 million homes had been lost to foreclosure. About 1 million borrowers who went through foreclosure during the crisis have already waited the required three years to be eligible for an FHA-backed mortgage.

The administration broader push to ease lending is running up against other hurdles. The government through mortgage finance firms Fannie Mae, Freddie Mac or federal agencies have guaranteed as many as nine in 10 new loans as of recent years. But during the duration of the last four years, banks have had ti buy back tens of billions of defaulted loans as Fannie, Freddie and the FHA faced mounting losses. Due to the uncertainties about these “put backs” lenders have imposed more conservative standards than what federal entities require.

The FHA says it has a separate effort under way to provide greater clarity about when banks could face put backs following on the work of the regulator for Fannie and Freddie last year. Lenders say those changes haven't been specific enough to change their lending posture. 

In speeches through out the year, officials at the Federal Reserve have raised concerns that tight lending standards could make it harder for those young borrowers, who tend to have lower credit scores to obtain a mortgage. The Fed quarterly survey of senior loan officers have found that while indicated a growing willingness to extend credit to borrowers with high credit scores, roughly 30% of lenders in April reported that they were less likely than a year earlier to extend FHA backed loans to borrowers with lower credit scores.

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