Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Opening the Door a Crack Hud Now Allows New Mortgages a Year after Bankruptcy or Foreclosure, but Many Expect Banks to Stick to Three- Year Waiting Period

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Opening the Door a Crack Hud Now Allows New Mortgages a Year after Bankruptcy or Foreclosure, but Many Expect Banks to Stick to Three- Year Waiting Period

Article excerpt

Federal housing authorities want to make it easier for people who lost their homes due to bankruptcy or foreclosure as a result of the economic downturn five years ago to qualify for a new mortgage -- sooner rather than later.

The Department of Housing and Urban Development last month changed its rule requiring a three-year waiting period for people who have lost a home due to foreclosure or bankruptcy, opening the door for them to buy another home in only one year as long as they have fixed whatever financial problem caused them to lose the previous home.

"Three years can be a long time for a family to wait for a loan, and putting money into a rental instead of an investment can result in a loss," said Don Frommeyer, president of the National Association of Mortgage Brokers in Plano, Texas.

"This is an effort to help boost the housing industry, which is a major part of jump-starting the economy."

At a time when interest rates are ticking up and new mortgage applications are on the decline, the rule change could make more people eligible for mortgage loans, even if their credit was ruined during the Great Recession.

But the Achilles' heel of the rule change is that banks and other mortgage lenders are not required to abide by it.

The new rule, published Aug. 15, gives financial institutions the option of reducing the waiting time to one year for troubled borrowers. But many are likely to stick to the old three-year waiting period.

"The reality of the new HUD rule is it won't change anything," said Tom Hosack, president and CEO of Northwood Realty in Franklin Park. "The lenders actually have more stringent internal requirements than HUD does anyway. Lenders still do not feel comfortable lending to people one year out of bankruptcy and are still requiring them to wait longer."

He said at the height of the housing boom lenders were more impressed with the value of the collateral than the creditworthiness of the borrower. Institutions had the idea that even if the borrower defaulted, the bank could always get its money back from the sale of the property, which at that time seemed headed nowhere but up.

Now with memories of the housing crash still fresh, lenders have gone back to closely scrutinizing the credit history of borrowers to determine their likelihood of repaying loans.

"Banks are being a little too overcautious," Mr. Hosack said. "But it is the byproduct of them being too liberal for too long. ... People who had a bankruptcy or foreclosure are more likely to have a second one, and banks want to make sure people have their act together before making a loan to them."

Mike Blehar, principal at Green Tree-based financial services company Fort Pitt Capital Group, said he often works with clients who are either buying a new home or refinancing an existing one, which means he deals with several banks. …

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