Waiting on the Boomerang

Return or boomerang buyers have grown in numbers in recent years. Forecasts indicate that these former homeowners who experienced a foreclosure or short sale will return to the market in greater volume in the years ahead. However, lack of knowledge about special financing programs or lender overlays are hampering this group’s return.

Several factors could hinder a boomerang buyer’s ability to purchase another home including an impared credit score, a weak job situation, or a family matter. Mandatory waiting periods for financing through the FHA, VA, or the GSEs also impact return buyers. As depicted below, the FHA, VA, and GSEs restrict acces to credit following a foreclosure for a minimum of 3, 2 or 7 years (bottom left), respectively, though the GSEs are more lenient for a short sale.

However, if the consumer can prove that they lost their home due to a decline of income, loss of employment or some family situations they may be eligible for the extenuating circumstances criteria. Consumers eligible for this program may be be able to attain financing in as little as a year through the FHA or VA programs (above right).

The chart above depicts the distribution of years in which the foreclosures or short sales took place for return buyers who purchased their subsequent home in 2014.[1] The data is also displayed by the type of financing used. Because each financing program has a standard and extenuating circumstances option, one would expect to find two concentrations of buyers in each distribution: one around[2] the standard time frame and another near the extenuating circumstances opportunity. This two-hump or bicameral pattern is evident in the conventional (green), but not for the VA (red) and FHA (blue). The difference in timing for the VA program is minimal and may result in the single hump. However, there is only one peak in the FHA’s distribution as well and it is higher or more concentrated than the other two distributions. Furthermore this point is four years prior to 2014, suggesting that the bulk of return buyers who use the FHA’s program are waiting three years and not taking advantage of the shorter extenuating circumstances option. Likewise, the VA distribution is most concentrated three years prior to re-purchase, aligning with the two year wait under the VA’s standard foreclosure definition.

There are four potential reasons for borrowers not taking advantage of the shorter waiting period of the extenuating circumstances program at the VA and FHA:

• Consumers are not aware of the program,
• FHA and VA customers do not qualify for the extenuating circumstances,
• Lenders are not aware or do not offer the program, or
• Overlays are having an impact on this group’s ability to credit qualify for the program

Unfortunately, we cannot measure consumers’ awareness of the FHA’s program from this survey nor can we measure these consumers’ credit scores. Survey work by the FHA indicates that the majority of former homeowners who were financed by the FHA and experienced a foreclosure or short sale would have qualified for extenuating circumstances[3], but this does not necessarily imply that they would choose FHA financing again as pricing was higher for the FHA than conventional in 2014. However, these consumers’ initial choice of FHA suggests that they are either credit, capital or capacity constrained and would likely choose this program again. Finally, a review of several lenders’ product offerings suggests that many lenders do not offer the shorter option[4] for FHA and VA products. Furthermore, because this group’s credit scores are impacted by distress sales which can take years to recover[5], well documented credit overlays[6] on FHA production could be having a disproportionate impact. While not definitive, the latter two issues may be constraining this group.

From 2006 to 2014 nearly 9.3 million homes were foreclosure on or short sold. Homebuyers who experienced a short sale or foreclosure are returning to the market in growing numbers and will continue to do so over the next decade. While financing channels have expanded to provide opportunities for these potential return buyers, limitations persist.