Since 2007, maneuvering through the murky waters of government-backed mortgage-finance policies seemed to be nearly impossible for borrowers and real estate professionals alike. Whether you were seeking a short sale from your lender, or you were a borrower forced to endure the painful experience of foreclosure, the end result to your credit was the same. Eventually, real estate professionals were turning away most borrowers with a foreclosure, bankruptcy, short sale, or deed-in-lieu on their credit record. Homeowners with disparaging credit were advised that foreclosures and short sales can stay on a credit report for up to seven years, making it difficult (if not impossible) to qualify for a reasonable loan. Conversely, struggling homeowners were watching their homes decrease in value while trying to avoid foreclosure or short-sale alternatives.
However, this all may be changing. As recent as July 29, 2014, the Federal National Mortgage Association (FNMA) decreased the waiting period for residential owners who had a previous bankruptcy, foreclosure, short sale or deed-in-lieu of foreclosure to purchase a new residence. Below is a comparison of previous vs. new waiting times for a borrower qualifying to purchase a new residence through FNMA:
• Foreclosure: Previous: 7 years, Now: 3 years with “Extenuating Circumstances” (including loss/decrease of income). The floodgates will open for this exception.
• Short Sale/Deed-in-Lieu/Charge-off: Previous: 4 years, Now 2 Years.
• Bankruptcy (Ch. 7): Previous 4 years, Now 2 years.
• Multiple Bankruptcies: Previous 5 years, Now 3 years from most recent Bankruptcy.
As indicated above, FNMA lender underwriting requirements are relaxing. Since FNMA is the largest purchaser of conforming residential loans, lenders across the board will follow FNMA’s underwriting guidelines. It may take up to 6 months from FNMA’s guideline announcement for originating lenders to change their underwriting standards. This would then result in an increase in the number of purchases of residential properties, and an increase in demand and sales. If that happens, the end result would be greater demand than supply, which means increased property values.
Within the next two years, the likely next step for FNMA will be to allow “stated income” or decreased documentation for income under certain circumstances. Another option for a FNMA underwriting change would be to offer new loan options that reduce the required monthly income threshold, such as (1) reduced LTV% (Loan-to-Value percentage) and (2) creative loan options, such as negative amortization loans (which were previously offered before the meltdown). Based on the strength of lending and real estate agent/broker lobbyists and the elapse of time since the last real estate crash (2007-10), additional relaxation may follow. Although the change in FNMA guidelines will be in small increments, when pieced together the result could be the same lending atmosphere that caused the 2007 real estate collapse. It is very possible that we are now embarking on a brand new real estate bubble. Not only will this affect homeowners, borrowers, brokers and real estate agents, but we will also see an increase in construction and development.
The real estate attorneys at Kring & Chung, LLP, some of whom also maintain real estate broker’s licenses, are knowledgeable and ready to assist homeowners, agents, brokers with any and all real estate related legal matters in this rapidly evolving market. Whether you have easement issues or construction defects, are a borrower, lender, real estate professional or contractor, if you have any legal questions, please feel free to call Anna Greenstin Kudla at Kring & Chung.