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Buyers Returning to Housing Market Ready, Willing, and Able?

by devteam April 21st, 2015 | Share

There are 9.3 million former homeowners who were displacedrnby foreclosures, short sales, and deeds in lieu of foreclosure between 2006 andrn2014.  Do they constitute a potentialrnmarket that could drive demand for new and existing homes over the nextrndecade?  The National Association ofrnRealtors® (NAR) has just released a study of that pool and their findings thatrnmany of them are already homeowners again and many others will never return to homeownership.</p

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To date, nearly arnmillion of these former owners have returned to the market and many more ofrnthese “return buyers” (also referred to as “boomerang buyers”) are alreadyrnqualified, but waiting.  Overlays and credit impairment have held arnsignificant number back and could impact thousands more potential return buyersrnin the coming years. rn</p

Lawrence Yun, NAR chief economist, says there were two waves of defaults during thernhousing crisis, the first involving subprime and then prime borrowers. “Whilernloose lending standards in the mid-2000’s led to the rise in subprime buyersrnwho ultimately became distressed owners, falling home prices and risingrnunemployment resulted in a large share of prime borrowers also defaulting orrngoing through a short sale,” he said. “Now fueled by a gradually improvingrneconomy and the strong rebound in home prices, some of these former distressedrnowners have returned to the market, and more will likely become eligible inrncoming years.” </p

NAR analyzed these former owners takingrninto account multiple factors:</p<ul type="disc"

  • The time a buyer must wait to be re-eligible for arn financing program with timing like the FHA</li
  • The time necessary to repair the distressed seller’srn credit</li
  • Whether the distressed seller’s credit profile, at thern time of purchase, was unacceptable by historic, sound underwritingrn standards</li
  • Whether the return buyer would meet credit overlays inrn the current stringent environment</li
  • The time needed to build down payment for a purchase</li
  • Whether the buyer has the desire to own again</li</ul

    In an article on NAR’s Economic Commentaries Blog,rnKen Fears, Director, Regional Economics and Housing Finance reported that thernstudy found the time required for the former homeowners to repair their creditrnscores, build a down payment and other post-distress factors are limiting thernreturn of many to the market, however since 2006 it appears that about 950,000rnhave purchased homes.  </p

    Using data from the Hope Now program NAR subdividedrnborrowers into prime and subprime categories and imputed estimates ofrnowner-occupants.  The resultingrnhomeowners were then separated into year-buckets based on their re-eligibilityrnfor FHA financing which requires a three-year waiting period for foreclosuresrnand short sales (with exceptions for extenuating circumstances which the studyrnalso attempted to take into account.) </p

    The FHA programs guidelines requirernless wait time, lower down payments, lower FICO scores, and a shorter waitingrnperiod for potential return buyers and thus a better avenue for re-entry to thernmarket.  While some borrowers may use thernVA or the extenuating circumstances program at the GSEs NAR uses FHA asrnshorthand for those other programs.  Thernchoice of program and eligibility for extenuating circumstances shifts therndistribution of repurchasers significantly. rnA simple estimate that assumes the use of GSE programs for eligibilityrnand/or excludes extenuating circumstances misses many borrowers who would berneligible earlier and including investors over-estimates the number of ownerrnoccupants returning.</p

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    NAR said that while distressed salesrnhave a significant negative impact on a borrower’s credit score (50 to 125rnpoints for a short sale, 85 to 160 points for a foreclosure), distressed salesrnare often a sign of a larger problem and issues with other lines ofrncredit.  The cumulative impact is a droprnof 170 to 200 points which can take years from which to recover.  Further, this pattern tends to persist forrnyears after foreclosure.  </p

    </p

    Annualrnestimates of the share of foreclosed borrowers that recover to pre-event creditrnscore levels were incorporated to adjust the year-buckets by the time forrncredit recovery.  As depicted above, after 10 years the credit profile ofrnnearly all subprime borrowers had recovered to ex-ante levels, while justrnroughly 70% of prime borrowers had recovered.  For this analysis, arnborrower is assumed ready to purchase once they achieve their pre-crisis creditrnscore.</p

    Research by Federal Reserve economist John Krainerrnsuggests that roughly 40% of prime buyers and 10% of subprime borrowersrnpurchase again within 10 years after foreclosure.  NAR researchrnextrapolated this to assume that 20.5 percent of subprime borrowers are willingrnto repurchase and 77 percent of prime borrowers.  The lower willingness to buy among subprimernborrowers is in line with other research findings that the intentions to ownrnamong lower income respondents was less predictive of behavior.   These estimates do not take into account thernability to build a down payment and reserve. </p

    NAR says that beyond the required waiting period not allrnhouseholds with the desire to repurchase could have obtained a mortgage inrnrecent years.  Credit scores for both FHArnand GSE mortgages are elevated 40 to 60 points from historic norms and manyrnlenders and aggregators overlay even higher scores.  The risk layering that allowed some borrowersrnto obtain their old mortgages have been minimized under new regulations, and somernborrowers were only able to obtain financing during the boom by using risky andrnhigh priced loans.  Combined, these conditions creaternheadwinds to re-entry for subprime borrowers for which the research had tornaccount. </p

    NAR found that, inrnaddition to the roughly 950,000 former owners who have once again becomerneligible for FHA financing and are assumed to have bought an additional 163,000rnare both program and credit qualified but may face lender overlays. Anotherrn187,000 have multiple risk factors that lax lending standards during the peakrnoverlooked.  These borrowers, though programrnand credit eligible, would likely not qualify in a market with normalizedrnunderwriting standards.</p

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    Looking ahead NARrnestimates that between now and 2023 another 1.63 million former homeowners willrnbecome program and credit eligible; 140,000 will face problems because of theirrncredit and half of these will not qualify in a normalized underwritingrnenvironment. </p

    The bulk of subprimernborrowers are already program eligible for financing and are likely waiting tornbecome credit eligible while the bulk of prime borrowers are not yet program eligible.     Nearly 260,000 will not qualify in therncurrent underwriting environment.</p

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    The states likely to benefit the most</bfrom returning buyers are essentially the same that suffered most during thernforeclosure crisis.  Between 2006 andrn2014 California has seen the most returning buyers, followed by Florida,rnArizona, Michigan and Georgia.  Over thernnext nine years NAR projects that Florida will nearly catch up with Californiarnwhile Illinois and Georgia will rise modestly. rnThe shift in the future trend will reflect a larger share of primernborrowers dragged into distressed events as result of price declines and weakrnemployment rather than risk lending.</p

    </p

    NAR says as the bulk of the remainingrngroup of return buyers will enter the market over the next five years butrnoverlays will continue to push off a significant number.  “These return buyers constitute demand thatrnis in addition to nascent household formation and the normal baseline demandrnfrom trade-up buyers.” It is possible that new scoring models that credit formerrnowners for their performance paying rent, utility, and telecom bills will improvernthe propensity of these borrowers to return, while reducing their risk tornmarket insurers.</p

    Since FHA will be the financing choicernfor many of these buyers the agency will need to maintain a broad andrndiversified pool in order to limit the impact of losses.  Most, however will have restored their primerncredit profile.  These buyers have a profile similar to trade-up buyers;</bfurther along their lifecycle and likely to prefer single family housing ratherrnthan condos or coops.</p

    NAR concludes, “The country and housingrnmarket are still healing from the collapse of the foreclosure and distress salernwave.  As home prices rise and the economy improves, these trends willrnabate, but there remains a large reserve of former owners who have the desirernand ability to return to the market.  New credit models and financingrnopportunities combined with fundamental changes to the mortgage originationrnprocess will help to ensure that soundness of the market as these borrowersrnreturn.”

    All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.

  • About the Author

    devteam

    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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