FHA: Foreclosure One Year Ago? No Problem!

I received tips from two different people in the last few days about a recent change in FHA underwriting standards announced in a letter titled “Back to Work – Extenuating Circumstances

Quoting from the letter:

As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.

In other words, they’re throwing the gates wide open, extending FHA-insured financing to borrowers who have gone through foreclosure, deed-in-lieu, short sale, or bankruptcy as recently as one year ago. The waiting periods were previously three years after a foreclosure or short sale and two years after a Chapter 7 bankruptcy.

To me the three-year waiting period seems completely reasonable. Why would FHA feel the need to shorten it to as little as one year? My tipsters have their theories.

Says one:

…FHA is nearly broke and this creates huge churn in fees. …it was only a matter of time before they did something like this to keep the churn going. …it is still almost hard to believe they would take it this far.

The other’s theory is remarkably similar:

In my opinion the reason FHA has relaxed underwriting guidelines is because the FHA Mortgage Insurance Fund is dangerously low and they need to invite more people to use FHA because they need more mortgage insurance premiums to pay losses on future claims.

I think people who are that close to financial disaster in their recent past need to stop and think before jumping into home ownership again. It’s really not for everyone… lots of work… cost of upkeep. I know the industry especially Realtors will jump all over this.

HUD Secretary Shaun DonovanOne thing we can be sure of: HUD Secretary Shaun Donovan (pictured at right) isn’t pushing through a major decision like this out of the kindness of his heart and unbridled empathy for downtrodden homeowners. National government agencies make big policy changes for one of two reasons: the new direction either furthers someone’s political agenda or it is a necessary reaction to cold hard economic facts.

Given that this move isn’t getting the usual media circus attention that the political agenda items typically receive, I’m inclined to subscribe to the theory offered by my two tipsters.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    ChrisM says:

    Correct me if I’m wrong, but I thought mortgage insurance never went away under FHA mortgage until the loan was completely paid off…. Seems like that makes FHA mortgages significantly less attractive.

    Hmm, maybe an 80k credit for first-time home buyers using FHA? :-)

  2. 2
    mike says:

    After FHA insurance fees increased and extended to the life of the loan, the program is attractive to a much smaller group of buyers. Cutting the waiting period opens it back up to other people that have few options for getting a conventional loan.

    It’s probably worth pointing out that the FHA funding issues are mostly due to the loans issued during 2007-2009 when the program was explicitly used to slow the rate of price declines. Personally, I don’t think that was an appropriate use as it set up marginal buyers to take a huge hit for little benefit. Recall that it wasn’t until AFTER that carnage that much was done to fortify FHA’s loss reserves. At least in this case, the fees are in place to (hopefully?) cover the true risks inherent in lending to marginal borrowers.

  3. 3
    Erik says:

    How do I get house counseling so I can get another property? Sign me up! When I relapse, I can blame it on my housing counselors. I think I need housing rehab. I am addicted to free rent and the cash incentive given for leaving the residence.

  4. 4
    Young Gun says:

    Bernie Madoff is not the only person who can run a ponzi scheme. I think it is the administration shoting itself in the foot and not enforcing real consequences. Some folks, even friends of mine milked the system for years. I had one buddy who bought his house brand new, paid for 6 months, and then lived rent free for almost 3 years. Part of that time he rented the house out. Let the market correct on its own. That will lead to a more sustainable recovery.

  5. 5
    David B. says:

    Paging Mr. Ponzi on line one…

  6. 6
    Blurtman says:

    RE developers can walk away from massive loans, and yet raise more money without having to take a three year time out. Why not individual homeowners?

    “In the beginning, investors and lenders could not get enough of the record-breaking $5.4 billion deal to buy the largest apartment complexes in Manhattan: Stuyvesant Town and Peter Cooper Village….The partnership that bought the 80-acre property on the East River announced on Monday that it was turning the keys over to its lenders after it defaulted on its loans and the value of the property fell below $2 billion.”


  7. 7
    No Name Guy says:

    Why, what ever could go wrong with this policy change?

    (Hmmmm, while stroking beard with a thoughtful gaze).

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