As published in Scotsman Guide's Residential Edition, July 2008.
As foreclosures continue to increase nationwide, the government and the mortgage industry struggle with ideas for helping homeowners avoid this outcome.
There have been some proactive steps to try to help, such as temporary raises in Fannie Mae and Freddie Mac conforming-loan limits and Federal Housing Administration (FHA) median limits (see sidebar).
To date, not much has helped.
Brokers might wonder how to find future financing for homeowners who are walking away from their homes or who are forced to default on their mortgages because of declining values. Typically, consumers must wait seven years to receive new credit. After a foreclosure, the FHA has a two-year waiting period.
Foreclosed-upon borrowers who wish to obtain another mortgage sooner often don't know where to turn. This creates an opportunity for mortgage originators who know how to handle these borrowers and their situations.
There are many things brokers should know when helping clients with foreclosures get a new mortgage. First, you must know what brought them to their situation. Then you must know what you can do for them. And finally, you must know what makes sense for the industry.
Know the background
It is important to understand the borrowers with whom you will be working and how they got into their precarious situation in the first place.
One factor for some is the looser underwriting standards in the industry in the past few years. In the past decade, lenders developed loan programs that relied almost solely on credit-scoring. This only predicts a 90-day late on any account in the next 24 months, however. It does not predict the chance of foreclosure, and it is not mortgage-specific.
Lenders also created 100-percent-stated-income loans that allowed homebuyers to overbid for homes using borrowed money rather than their own. There also were many creative-financing structures, such as option ARMs and short-term fixed rates with interest-only options and 40- and 50-year amortizations.
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