Seriously, who’s a better risk for a mortgage than someone who has already lost a home to foreclosure?

This is my column for this week from the Arizona Republic (permanent link).

Seriously, who’s a better risk for a mortgage than someone who has already lost a home to foreclosure?

We talked last week about credit flexibility among merchants as they try to find ways around the banking crunch. The flip side of the same coin is how the credit marketplace will react, going forward, to home foreclosures.

You’ve heard all your life that a foreclosure is second only to a bankruptcy in the way it will ruin your credit. This is still true, but “ruin” may turn out to be an adjustable calamity.

Here’s why: A lot of people are going through foreclosure. Ninety percent or more of homeowners are unaffected by the wave of bank repossessions, but that still leaves millions of people who are going to have a foreclosure on their credit for the next seven years.

What’s going to happen to those folks when they go to the furniture store or the jewelry store or the car dealership? They might end up paying a higher interest rate, but they’re still going to get financing.

I have been advising my investor clients for months to ignore recent foreclosures on credit reports. Past performance on every other sort of credit account matters a lot. But if landlords refuse to rent to folks who have lost their homes, they will be turning away half or more of the tenant population.

My take is that, right now, a recent foreclosure is like hospital debt: If everyone else was getting paid before, during and after the financial catastrophe, you just have to look past the elephant in the room.

And here’s the funny part: I am sure this will apply to home loans in due course, also. If mortgage money remains freely available, lenders will find a way to overlook recent foreclosures in order to underwrite new home loans.

We can hope that, this time, interest rates will reflect the true risk lenders are taking on. But this country runs on credit. Just because a borrower recently defaulted on a six-figure debt, that’s no reason to withhold the unlimited boon that is homeownership.

In America, we can sell ourselves on anything — provided we don’t have to pay for it today.

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4 Comments so far

  1. Linsey December 10th, 2008 9:44 am

    I’m not sure what I think of this. I think it is clear that many of those that foreclosed should never have been approved for a home loan in the first place. When home ownership spiked in recent years, on the surface we think that it’s a good thing. But, with lax lending, home ownership was extended a bit TOO far.

    That being said, should someone that has been foreclosed upon in recent years get a home loan? Should we chalk it up to tough times in the overall economy? I don’t think so. I read yesterday that many of those that have received a loan modification, merely months later are defaulting again.

    I don’t want to ‘withhold the boon that is home ownership’ but I think the scrutiny given to borrowers should not necessarily be with that end in mind.

  2. Atlanta Realtor December 14th, 2008 7:53 am

    Thats food for thought. As a landlord myself I have rented to a couple of tenants who did have foreclosures on their credit report. At the time it seemed like somewhat of a risk but they turned out to be the best we have had. They have been very happy and taken great care of the property because they had a hard time finding housing due to their scores. I have now even considered marketing vacant property as being available to tenants with foreclosures in their history. I think I would be able to rent out property in a heart beat due to so many people caught in the renting/bad credit predicament.

  3. Real Estate Property Investments December 29th, 2008 4:39 am

    It is really very tought.

  4. Jeff Ellis January 3rd, 2009 1:27 pm

    I totally agree with those views, it seems there will have to be some changes down the road. My only hope is that it is sooner than later:)

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