FHA Rule Could Disqualify Potential Homeowners
With lenders tightening their loan policies, getting a loan in this economy has been hard. A small change in the Federal Housing Administration rules for mortgage lending this week has made borrowing even harder.
The rule, which was announced in February but goes into effect July 1, disqualifies FHA mortgages to anyone with more than $1,000 in unpaid medical, student loans or any other outstanding balance that went into collection accounts in national credit bureau files.
So, if you have an outstanding balance of $1,000 or more on collection accounts, you must pay it off immediately or spread it out into three months of verifiable payment under a payment plan.
This could be a huge blow to an already battered housing market, which seems to be slowly limping its way to recovery. Already, a lot of first-time buyers were shut out of the market because of strict lending policies. Craig Brock, a mortgage lender with Rancho Financial in Encinitas told the San Francisco Chronicle that about 6 percent of buyers could be affected by the new FHA rule. To make it worse, lenders have been given a freehand to add their own addendum to the FHA rule. The one positive is that the rule doesn’t require borrowers to clear their collection accounts as a condition of mortgage approval, the Chronicle said. But, it does require court-ordered judgements to be paid off in full for the mortgage loan to qualify for FHA insurance.
Short Sales Rise to Three-Year High
Short-sales skyrocketed 25 percent, touching a three-year high in the first quarter, according to foreclosure reporting firm RealtyTrac Inc. Homeowners offloaded 109,521 homes into the market for less than what they owed on their mortgages, narrowly dodging their homes from being repossessed by lenders.
The numbers indicate that lenders, instead of pursuing the foreclosure process, allowed homeowners to offload their property in the market at a loss. If the trend continues, short sales transactions are at a pace to surpass foreclosure deals, according to RealtyTrac. Bank-owned homes sold during the first quarter fell 15 percent to 123,778 units when compared to the previous year.
“Next quarter nationwide, we’re actually going to see the number of pre-foreclosure sales outnumbering bank-owned sales,” Daren Blomquist, RealtyTrac’s vice president told Bloomberg in an interview. “It’s a paradigm shift in the way lenders are dealing with their distressed loans.”
The shift toward more short sales is lenders’ way of dealing with the increasing number of distressed mortgages, thereby reducing losses. It also helps arrest prices from a free fall triggered by too many foreclosures.
“Lenders are approving more aggressively priced short sales, which in turn is resulting in more successful short-sale transactions,” RealtyTrac Chief Executive Officer Brandon Moore said in the report.
Pending Home Resales Drop
Signed contracts for previously occupied homes fell in April by the most in a year, according to the National Association Realtors®.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, not closings, declined 5.5 percent following a revised 3.8 percent gain in March. Despite the decline, the numbers are still 14.4 percent up from April 2011. Economists surveyed by Bloomberg were not expecting any change in the measure.
The report is a sign that the housing market is still in the doldrums. Consumers continue to sit on the fence despite record low mortgage rates and lucrative home prices. For many, credit continues to be an issue as lenders tighten their loan processes. For others, the economy continues to be a cause of worry with foreclosures still hanging over the market.
“The pattern of demand is sluggish and volatile,” Yelena Shulyatyeva, a U.S. economist at BNP Paribas, who projected a decline, told Bloomberg. “Until the supply issue is resolved, we could see further declines in prices and the housing market will continue to hover around the bottom. It’ll be a gradual improvement, we don’t expect anything stronger than that.”
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This FHA rule seems like a bad idea at a bad time. There are a lot of anecdotal signs pointing the the beginnings of a housing recovery. Disqualifying potential homeowners at a time like this can’t be good for the economy.