They're back!
Dubbed the "boomerang buyers" by the Wall Street Journal, an estimated 1.5 million boomerang homebuyers may be able to purchase a home again by 2014, even though they went through a foreclosure or short sale.
So how will boomerang buyers affect the real estate market? Are there more boomerang buyers to come?
Supply and Demand
Boomerang buyers will help continue the real estate recovery. Many large metropolitan areas already have begun to experience increased home sales, which boosts sales prices. Purchasers, including investors, are taking advantage of the current, relatively low interest rates before home prices and interest rates increase. This activity is reflected on a recovery map at cnbc.com.
However, some areas have a shortage of homes to sell. One source of available homes is the backlog of foreclosures. Some of the most distressed cities noted on the recovery map are locations with potentially large backlogs of foreclosures.
One reason the release of foreclosures has been delayed was lenders' self-imposed moratorium on foreclosures in response to the robo-signing scandal (which brought about the National Mortgage Settlement Act). Another reason may be the length of time (up to three years in some cases) that a foreclosure takes to work through states' judicial processes.
The foreclosure map at realtytrac.com shows the highest hit areas. The states with the highest foreclosures are Florida, Nevada, New Jersey and Maryland; states with the lowest are North Dakota, South Dakota, Nebraska and Alaska.
However boomerang buyers won't have it easy. These buyers will need to overcome numerous hurdles:
The time frame a buyer must wait after a foreclosure or short sale varies with loan programs.
The down payment requirement may also depend on the loan program. For example, the Federal Housing Administration backs over 20 percent of new mortgage loans, so you may be able to obtain a loan with only 3.5 percent down if you wait three years. At least a 20 percent down payment seems to be the magic amount to shorten a time frame you usually must wait.
Your credit score will definitely affect your interest rate. The lower your score, the higher the additional interest adjustment tacked on to the "good credit" interest rate.
If you have had a foreclosure or short sale, contact your local lender to discuss your specific circumstances because additional requirements may be imposed.
Mortgage delinquency
Are more boomerang buyers still to come? According to a TransUnion fourth quarter 2012 report, the delinquency rate hit a four-year low at 5.19 percent versus 6.01 in the previous year. At the height of the crisis in 2009, the rate was almost 7 percent in the 4th quarter.
Historically the delinquency rate has ranged between 1 and 2 percent; yet remember how quickly delinquencies escalated in such a short time. Compared to 2006, the delinquency rate increased 54 percent in 2007, another 53 percent in 2008 and another 50 percent in 2009. Not until 2010 did the trend reverse and the rate slowly began to decrease, dropping by 7 percent, then another 6 percent in 2011 and another 14 percent in 2012. We have a long way to go to get to more normal levels.
A few reasons for the reduction in the mortgage delinquency rate:
Lower interest rates allowed many homeowners to refinance out of adjustable rate mortgages. Homeowners with enough equity refinanced a couple of times to take maximum advantage of the lower rates. Fixed rate mortgages make up 88 percent of mortgage loans today.
Loan modification programs such as the Home Affordable Foreclosure Alternative, the Home Affordable Modification Program, and the Home Affordable Refinance Program gave some relief to struggling homeowners who qualified and were persistent with their lender.
The Mortgage Debt Relief Act of 2007 (extended through 2013 by the American Tax Relief Act) provided tax relief. This act allowed homeowners who went through debt reduction, foreclosures, short sale, or deed-in-lieu of foreclosure not to be subject to the resulting taxable income that technically occurred as a result of a forgiven debt.
So far the National Mortgage Settlement Act of 2012 has helped almost 553,000 borrowers for a total more than $42 million. This averages to more than $80,000 each with some type of consumer relief. A recent report from the Monitor of the National Mortgage Settlement is available here.
So if you are a boomerang buyer, don't despair. Work on your credit score and keep saving. As the real estate market continues to improve, eventually boomerang buyers may come full circle back into homeownership.
Barbara and Clair Ramsey are local associate brokers specializing in residential real estate. Their column appears every month in the Daily News. Their e-mail address is info@ramseyteam.com.
Barbara and Clair Ramsey
Housing