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Once credit-challenged 'boomerang buyers' set to return in droves


Millions of people who lost their homes to foreclosures or short sales in the aftermath of the housing crash will regain their credit in the next five years and potentially qualify to take out a home loan again.

So-called “boomerang buyers” – which the credit tracking agency TransUnion estimates could total 700,000 people alone this year – presents a pool of potential borrowers every bit as significant as the coming wave of millennial buyers, some analysts believe.

“There were about 3 million consumers who got a mortgage [between the fourth quarter of 2013 and third quarter of 2014],” said John Mellman, vice president and head of TransUnion’s mortgage group.

“When you talk about 700,000 consumers, that is a significant percentage.”  

These former homeowners also aren’t necessarily a riskier class than the typical first-time homebuyer. Most people with recovering credit were once prime borrowers, TransUnion and other studies have found. They might have lost their jobs in the downturn and fallen behind on their mortgages payments because of a financial reversal, but weren’t typically the people who took out high-risk, subprime loans without having good-paying jobs and documentation during the housing bubble.

TransUnion evaluated the credit histories at three periods, in 2006 at the end of the bubble, in 2009 at the height of the crash, and again in 2014. The company predicts that some 1.5 million people in the next three years and 2.2 million people within five years could recover their credit and reenter the housing market.

The company also estimated that of roughly 7 million people who suffered a deep hit during the downturn, at least 1.2 million people have recovered credit already.  

Mellman emphasized that the company only looked at credit scores, and not at the other obstacles faced by potential boomerang buyers, such as their ability to repay and downpayments.

“These are potential entrants, and there are absolutely some qualifiers to that,” Mellman said. “On the positive side, these are all consumers that have wanted a mortgage in the past, right? In the past, they have shown a predilection toward wanting a mortgage. That does not guarantee that they will want a mortgage going forward, but it does hint at some kind of desire.”

Boomerang buyers face special obstacles

The high number of people with recovering credit doesn’t necessarily mean that the mortgage industry will see a huge surge in borrowing from this group.

Boomerang buyers potentially face tougher lending standards and psychological barriers to re-entering the housing market, among other challenges.

“After you lose a house, you are shell shocked for quite a few years,” said Tim Lucas, a licensed originator and the editor for MyMortgageInsider.com.

Lender “overlays” are one big hurdle. Fearing penalties if the loans default, some lenders have been requiring higher credit standards than mandated in the guidelines for government-backed loan programs.

“The lenders are definitely more strict when it comes to reapproving somebody for a house that has been foreclosed on before,” Lucas said. “The lender is obviously going to see that foreclosure on their credit report.”

Surveys of distressed homeowners suggest the long waiting period to regain credit remains the biggest obstacle for this group, said Ken Fears, director of regional economics and housing finance for the National Association of Realtors.

A person typically must wait three to seven years after a short sale or foreclosure, but each loan program has different standards.

“Right now we have estimated that about 1 million have come back and another 2 to 2 ½ [million] will come back over the next eight years, but there is always a potential for an upside,” Fears said. Credit tracking agencies, including the dominant Fair, Isaac and Co. (FICO), have been developing new models that take into account rental and other payments that were not traditionally used to establish a person’s score, he said.

“Because of the timeout period, they are likely going to be renting for a period, and so [in] two, three, seven years, you will have information about this person’s ability to repay, and willingness to repay. That can help boost their credit scores, much more so than what we have seen over the last decade or so.”

Fears also said many people have been able to recover credit and buy a house, a fact that may suggest that the issue of lender “overlays” has been exaggerated.

“A normal borrower would need a significant downpayment, high credit scores,” Fears said.  “It is a large hurdle, so we are assuming that people would come back through government financing, particularly [Federal Housing Administration loans] because they have a broader spectrum in terms of credit scores. The downpayment hurdle is lower, and they are the most lenient in terms of the timeout period.”  

In a recent study, RealtyTrac said boomerang buyers have a better chance of buying a home in troubled markets where many people lost their homes in foreclosures and prices are still depressed.

“They are not iron-clad buyers,” said Daren Bloomquist, vice president of RealtyTrac. “The places that they are most likely to come back are markets that are still affordable, especially  folks who don’t have a large downpayment, or cash. ... Places like Phoenix, Las Vegas, are prime markets to see boomerang buyers “

Bloomquist said these buyers could potentially be more active than young first-time buyers.

“This is as big, if not bigger, pool of potential buyers [than millennial first-time buyers] who will be coming on the market in the next four to seven years,” Blomquist said.“The big wildcard is how many are going to put their faith back into homeownership again, and be qualified to be a homeowner.”

 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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