'Rebound buyers' get help from FHA

Some question the wisdom of bankrolling borrowers who contributed to the bubble

Alejandro Lazo and Walter Hamilton / Los Angeles Times /

After two foreclosures and two bankruptcies, Hermes Maldonado is as surprised as anyone that he’s getting a third shot at homeownership.

The 61-year-old machine operator at a plastics factory bought a $170,000 house in Moreno Valley, Calif., this summer that boasts laminate-wood floors and squeaky clean appliances. He got the four-bedroom, two-story house despite a pockmarked credit history.

The last time he owned a home, Maldonado refinanced four times and took on a second mortgage. He put a Cadillac and Mercedes-Benz C300W in the driveway and racked up about $45,000 in credit card bills and other debts. His debt-fueled lifestyle ended only when he was forced into bankruptcy.

His re-entry into home-ownership three years later came courtesy of the Federal Housing Administration. The agency has become a major source of cash for so-called rebound buyers — a burgeoning crop of homeowners with past defaults who otherwise would be shut out of the market.

“After everything that happened, thank God I was able to buy another house,” Maldonado said in Spanish. “Now, it’s good because the interest rates are low and there are lots of homes.”

The FHA, which backs nearly 8 million loans, is helping rebound buyers recapture the American dream, boosting the housing market in the process. But that’s touched off a fierce debate about the financial and ethical wisdom of bankrolling borrowers who contributed to the last housing bubble — and the potential cost to taxpayers.

The agency has suffered deepening losses in the past three years that have put it under enormous scrutiny.

Created during the Great Depression to revive the devastated housing market, the FHA doesn’t originate loans. It guarantees mortgages made by banks in exchange for insurance premiums. The agency now insures more than $1 trillion worth of homes. This year it has backed roughly 14 percent of all mortgage originations, according to the trade publication Inside Mortgage Finance.

Critics worry that the FHA is foolishly allowing marginal buyers to get loans just three years after foreclosure with as little as 3.5 percent down. What’s more, the agency doesn’t even track how many rebound borrowers it backs.

Exactly how much money is hemorrhaging from the agency could be revealed this week, when the agency files a self-evaluation report to Congress.

According to Bloomberg, House Financial Services Committee Chairman Spencer Bachus, R-Ala., said Thursday that FHA officials have told him the agency will need a bailout from the U.S. Treasury within a month.

What’s unclear is how much money the agency needs to stay afloat. The Housing and Urban Development Department, however, has projected that $13 billion might be needed.

At a minimum, the experiences of Maldonado and other rebound borrowers illustrate how fast the financial errors of the boom are being wiped clean by government policy that is eager to give the housing market a boost.

“If somebody goes through foreclosure or bankruptcy, or whatever, you don’t allow them to jump back into the housing market as quickly as three years,” said Guy Cecala, publisher of Inside Mortgage Finance. “Aren’t you setting yourself up for future losses if you make those loans to the same high-risk borrowers?”

Proponents say rebound lending is essential to the economy. This group has emerged as an unexpected source of strength for housing this year, particularly in badly scarred areas.

Besides, advocates argue, giving people a second chance — or even a third chance — is as deeply ingrained in American culture as buying a home itself.

“It’s happening quite a bit,” said Doug Shepherd, owner of Shepherd Realty Group in Riverside, Calif. “It is something that is an important part of the coming market.”

Homebuilders and real estate agents are capitalizing on this market.

Some even keep files on former homeowners who will become eligible to apply for new loans once past transgressions are cleared from their credit reports.

Greg McGuff, division president of California’s Inland Empire for home builder Lennar Corp., said roughly 1 in 5 buyers in his region had either a previous short sale or a foreclosure. Many of them are eager to own again and often recognize the opportunity that declining prices and low-interest mortgage rates provide.

“They know to the day when the event clears from their credit history,” McGuff said. “Buyers are working diligently to improve their credit scores through the use of credit repair companies, not only to meet the minimum requirements, but also to ensure the best interest rate pricing.”

The FHA is trying to straddle the line between financial caution and doing what it can to aid the economic recovery.

Housing and Urban Development Secretary Shaun Donovan said the FHA has tightened its standards significantly but must still lend to those who wouldn’t otherwise qualify for a mortgage. It’s crucial for families to “show that they are responsible, that they have worked hard to re-establish their credit,” he said.

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