| NEW YORK
NEW YORK May 16 When Jennifer Anderson's family
could no longer afford their mortgage and lost their home, she
expected many years to pass before they would again become
But less than two years later, in March, they purchased a
$297,000 house outside Phoenix, Arizona, after qualifying for a
loan backed by the U.S. government.
They joined a small but growing number of Americans who are
making a surprisingly quick return to homeownership after
defaulting on their loans or being forced into short sales that
cost their banks money.
"We didn't really expect it," said Anderson, 40. "We were
resigned to the fact that we were going to be in a rental
property for a while."
Financial problems arose after she lost her job as a
customer service representative for a health insurance company
and her husband's hours at an automaker were cut. To make
matters worse, they used up her retirement savings trying to
keep their home.
Data is not available, but interviews with more than 30
lenders, builders, Realtors and consumers suggest that a growing
number of Americans are getting back into the housing market,
even though they went through a foreclosure, bankruptcy or short
sale in recent years.
"Most are not ashamed or bashful about what happened because
so many people were forced into that reality in the last six
years," says Graham Epperson, vice president of sales in Arizona
for the PulteGroup, a leading U.S. homebuilder.
They want to escape rising rents and take advantage of home
prices, which are down by about a third from an April 2006 peak.
FHA TO THE RESCUE
Much of the comeback wouldn't be possible without help from
the U.S. government, namely the Federal Housing Agency. It was
created in the 1930s as part of a broader push by Washington to
foster home ownership and fight the Great Depression.
The number of FHA-insured home loans has soared in recent
years as subprime loans have disappeared and fewer Americans
have qualified for conventional mortgages backed by Fannie Mae
and Freddie Mac, which were rescued in 2008
by the U.S. government after loan losses.
Federal Reserve Chairman Ben Bernanke stressed the point
last week, saying banks have become so restrictive that many
worthy homebuyers are being frozen out of the market, and
lending practices are not likely to loosen any time soon.
In contrast, FHA-backed loans are an option for many who
defaulted on their mortgages or were forced into a short sale.
FHA loans, combined with those backed by the Department of
Veteran Affairs or the Department of Agriculture, had a record
share of the market in 2011.
"These are not mainstream programs geared for mainstream
borrowers," says Greg McBride, senior financial analyst at
Bankrate.com, who expects to see more of those with blemished
credit reenter the housing market.
Most of these reentering buyers are using FHA-insured loans,
which at the end of 2011 accounted for about 30 percent of loans
for home purchases, compared with 4.5 percent in 2005.
A conventional mortgage typically carries a lower interest
rate than does an FHA-backed loan, but it also requires a credit
score of at least 720, proof of income and a significant down
payment. In contrast, FHA loans historically have been available
to help low and moderate-income families buy homes.
FHA borrowers typically need a credit score of at least 620
and a 3.5 percent down payment. The FHA charges an upfront
mortgage insurance premium of 1.75 of the loan (which can be
rolled into the mortgage) and an annual 1.25 percent premium on
the outstanding loan.
For some economists, alarm bells are ringing.
Edward Pinto, resident fellow at American Enterprise
Institute, a conservative think tank, said the rise of
FHA-backed loans flies in the face of the government's stated
mission of getting more private capital into housing finance.
Furthermore, a requirement that borrowers taking FHA-backed
loans make a down payment of just 3.5 percent of the purchase
price brings back bad memories of how many subprime mortgages
turned bad as housing prices began to fall in 2006.
According to the S&P/Case-Shiller 20-city composite index,
U.S. home prices were down 3.5 percent in February from a year
earlier and are now at their lowest since late 2002, although
there have been some signs that prices are beginning to inch up.
"FHA is putting people back into situations that still have
high risk of default," Pinto said.
He noted that a lot of these loans are made to consumers
with credit scores well below 720 -- the median national score
for all households-- and that about 15 percent of loans made to
people with scores of 620 to 659 are likely to fail.
A SECOND CHANCE
There have been about 4.2 million foreclosures in the United
States since 2007, according to data firm RealtyTrac. It expects
that number to climb to 6 million by early 2014.
A bankruptcy remains on a consumer's record for seven years,
but that consumer can start raising his or her credit score in
several months by decreasing debt, not borrowing more and paying
bills on time.
"Most of the loans that are getting done are for people who
have really rebuilt their credit," says Frank Donnelly,
president of the Mortgage Bankers Association of Metropolitan
Washington, D.C. "They have to prove (to the lender that) it was
something like a job loss that caused this and not chronic
As well as a minimum credit score of 620, lenders look at
why the person lost the home. They're much more likely to lend
to people who lost a job than to consumers who could have
afforded their mortgage but chose to default.
Builders eager to sell homes are not only offering to help
once debt-mired clients find loans but providing free
credit-counseling programs like the Homebuyer Solutions program
offered by Quadrant Homes in Bellevue, Washington.
"A lot of times when people enroll they just don't know
where to start," says Teage Christensen, manager of the
program. His goal: help clients get at least a 600 credit score.
Debra Eaton stumbled on the program when she and her husband
were visiting model homes out of curiosity. They had filed for
bankruptcy in 2008 after her husband was seriously injured at
work and she took time off from her job to care for him.
After the bankruptcy, their credit score plunged to 460.
"It's not that you don't pay your bills because you want to go
on vacation," she says. "You don't pay because you don't have
By November 2011, their credit score had improved to 680 and
Eaton and her husband, a veteran, qualified for a Veterans
Administration loan to purchase a $252,000 home near Tacoma,
Washington. They moved into the three-bedroom house the day
"If you would have asked me then if I was going to buy
another home, I would've told you no way," she says.