During the financial and housing crisis that gave birth to the so-called “great recession,” millions of homeowners found themselves underwater on their mortgages. Many more lost their homes to foreclosure, had to declare bankruptcy, or both. 
Housing has faced substantial challenges due to the amount of foreclosed homes on the market and the number of ineligible applicants with bankruptcy of foreclosure in their past. It hasn’t happened overnight, but there are signs that the tight lending guidelines put in place at the time are starting to loosen.
Is Subprime Making A Comeback?
In a move to help make more applicants eligible for conventional loans, Fannie Mae recently reduced waiting periods for borrowers who have a history of poor credit because of what’s referred to as a “significant derogatory event,” which is defined as:
- Foreclosure
- Pre-Foreclosure
- Short Sale
- Deed-in-Lieu of Foreclosure
- Bankruptcy
Under the new guidelines, borrowers are no longer required to wait a minimum of four years or longer after an adverse event to be be eligible to apply for a new conventional loan. In many cases, the waiting period has been reduced to just two years. This change makes conventional conforming loan wait times competitive with those for FHA loans, which were also recently reduced as part of the “Back to Work” program.
| Previous Fannie Mae Minimum | New Fannie Mae Minimum | Current FHA Minimum | |
|---|---|---|---|
| Bankruptcy | 4 Years | 2 Years | 1 Year |
| Pre-Foreclosure, Short Sale or Deed-in-Lieu | 4 Years | 2 Years | 1 Year |
| Foreclosure | 7 Years | 3 Years | 1 Year |
The shorter window applies to those who can show that “extenuating circumstances” led to their financial hardship. Examples of these circumstances are one-time events that are out of the borrowers control which can include divorce, injury, illness or a sudden loss of household income due to a job loss.
Mortgage applicants wishing to take advantage of this program will need to write a brief letter describing the reason for their financial hardship and provide documentation to substantiate their claim. The letter will also need to offer compelling evidence that the default was unavoidable given the circumstances.
Help for “Zombie Foreclosures”
A particular area of concern for many who ended up filing for personal bankruptcy at the time was the existence of what is known as a “zombie foreclosure.” When a borrower had his loan debt discharged in bankruptcy but still had his property foreclosed upon, he has been the victim of a zombie foreclosure.
Lenders resort to this dubious practice to avoid liability for the taxes, insurance, utility payments and assorted fees and assessments that it becomes responsible for once it takes title. Often, lenders record the foreclosure trustee’s deed only after a new buyer has made a firm offer on the property. Then, they record the deed so that it may be transferred to the new buyer.
These zombie foreclosures severely disadvantage a borrower because the waiting period to be able to apply for a new, conventional loan can take years to begin. Under these new guidelines, this will no longer be the case.
