For years, a mortgage default has pretty much been a guarantee that you would be renting or creatively financing your next home. Now, however, banks and other lenders are beginning to adjust their policies on former homeowners who defaulted on their mortgages, extending credit “beyond the best borrowers to include those with significant blemishes on their credit reports”[1]. This news comes out of a report by James Chessen, the American Bankers Association’s chief economist. He says that if a borrower is current on all loans except their mortgage, they are actually an attractive candidate for a new loan. However, says Chessen, good luck getting banks to acknowledge this new policy. Spokespeople for lenders have emphasized that mortgage defaulters are “significant risks” and that such would-be borrowers would have to prove that they were “willing and able to repay the loan” in addition to starting with higher interest rates than better-qualified applicants.
So what does this mean for people currently deciding which bills to pay? They need to remember that if a foreclosure looks like a strategic default, then this future advantage in borrowing goes out the window[2]. Homeowners will need to show “unusual financial circumstances, unemployment that was no fault of their own or other factors like negative equity” that would justify keeping other financial obligations “intact” while letting their mortgage go.
Do you think that lenders’ apparent willingness to let a past foreclosure “slide” is a good sign for the housing market, or do you believe that they are just letting unqualified borrowers back into the mix?
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[1] http://online.wsj.com/article/SB10001424052702303657404576365942659274426.html?mod=googlenews_wsj
[2] http://www.rwbpress.com/2011/06/02/home-loans-after-mortgage-default-getting-a-mortgage-after-losing-a-home-and-lending-from-banks-to-defaulted-borrowers/
This is more a question that needs to be asked of Fair Isaac. Will they adjust their credit scoring models to minimize a mortgage default? Because in the end, it will still come down to borrower’s FICO score whether they qualify or not.
It’s unfortunate that the meltdown has not exposed the fallacies of lenders complete reliance on FICO scores. One of the best run banks in the nation according to Forbes magazine does not rely on FICO scores for their mortgage underwriting. Too bad so few other lenders (and the secondary market) refuses to learn from this bank.
I think lenders will HAVE to eventually let former defaulters back in. Was it any fault of the buyers that their value was inflated by their lender, or that the bottom fell out of the housing market. Look, if 40% of all sales in the previous couple of months were distress sales, that means 40% of buyers are now frozen OUT of the purchase market. And rents are climbing through the roof. Are we thinking street camps (a la “hobo” camps of the great depression) will be looking good anytime in the forseeable future, because THAT’S the mess that the banks have created by freezing credit to the point that no one can qualify for new money.
I feel a mixed bag about this policy. There truely are people that need and would benefit from this but there are more that are just scamming to get things for nothing. It is not hard to lose a job deliberately then freeload on a mortgage till forclosure. I know of people that bought houses and either never paid a single payment or only a few then quit paying. They lived for free for years now before having to move and got $3000 from the banks to get out. How sweet is that…and they might be able to go out and do it all over again? Not cool.
They’ve already mention that these candidate will be scrutinized before they justify extending their credit.
What gets me is that some folks forget the $700 Billion the banks recieved without being scrutinized. Correct me if I’m wrong only $80 billion has been repaid. It has gone into the execs. pocket and NOW they get creative? And their still sticking the little guy with increased interest.
Banks and lenders are still looking out for themselves and don’t have to answer to the public. They need to do more than what they should have done when they recieved the $700 billion.
And this creative way of bringing candidates back into the credit industry is ridiculous. THeir putting folks in more debt then they already are.
Don’t forget who was responsible for this mess.