It’s no surprise that over the last several years a lot of people have experienced financial problems due to the economic downturn. Now that consumer confidence and employment opportunities have returned (respectively), traditional buyers are looking for ways to get back in the home buying game. They’ve been referred to affectionately as “Boomerang Buyers,” by the media. But what about all those buyers left credit-less because of an underwater mortgage that resulted in a foreclosure, short sale, or worse, bankruptcy?
To answer that question, Jay Papasan, our vice-president of publishing, executive editor and co-author of such bestselling books as The Millionaire Real Estate Agent, The Millionaire Real Estate Investor, HOLD, and most recently, The ONE Thing, sat down with mortgage expert Jim Sahnger to talk brass-tacks on a new program aimed at helping beleaguered borrowers earn back their buying power.
Editor’s Note: This special report was derived from a pre-recorded interview between Papasan and Sahnger. You can listen to the interview in it’s entirety on Agent Mountain if you’re a Keller Williams associate. For all other audiences, you can tune in right here on the KW Blog.
Papasan: What is the “Back to Work Program?”
Sahnger: The technical name is “The Back to Work Extenuating Circumstances Program,” and is designed to allow people who experienced a “Negative Credit Event” like a short sale, foreclosure or bankruptcy during the housing crisis to purchase a home. Typically these people would have experienced an extended delay of anywhere between two and seven years before they could purchase a home. Through this program, they have an opportunity to get back in within as little as 12 months. The program is going to remain in effect for any applications that have a case number through September of 2016.
Can you give us a little bit of background on it? How did they get to this amendment and when did it come out?
Absolutely. Since the beginning of the housing crisis – between 2007 and 2008 – over 4.4 million foreclosures have been approved. There’s also the issue of short sales, which, just last year, accounted for 1 in every 5 homes. Today, it’s nearly 1 in 10 homes. Because of these two events some homeowners had to file for bankruptcy. All of these situations had what they refer to as a “Negative Impact” on somebody’s credit. And let’s not forget that there is still currently over 4.5 million homes that are seriously delinquent or are still in foreclosure. So, not only have these situations impacted people in the past, they will continue to impact them over the course of the next several years.
So these people were essentially removed from the equation in terms of “home ownership” through at least 2015.
Some even had problems all the way up to 2010 because they didn’t experience a “Negative Credit Event” as their foreclosure or short sale made its way through the system. Consequently, waiting periods to restore credit became even longer because you’ve now added an additional two to seven years on top of the two to three years it took to complete the transaction. We’ve all seen it. We’ve all dealt with people who thought they could get back in the game at year three only to find out that, because the house didn’t go back to the lender until 18 months ago, the clock reset.
Why do you think the program is happening now?
Well, I think there are a number of different reasons, but I think profit is number one. As interest rates rise it’s impacting the number of applications that are being originated. Because of that, volume has declined, which prompts a loosening of credit. Beyond that, many of the distressed homeowners who would have normally been impacted by the normal waiting periods have already recovered and gotten another job. They’ve started to put money away and they’ve started to clean up their credit. And, they may now be in the best position to buy a home, particularly with where rates are now.
We understand there’s a business motive to profit – everyone wants the system to be back and healthy. Do you think they can loosen these standards in a responsible way?
Oh, absolutely. If you look at what the standards were when these people got into trouble, there was little-to-no documentation. So you had people that could merely step up to the plate if they had good credit … or in some cases didn’t have good credit. But because they had indicated a desire [to buy] and thought they could make a payment a lot of loans were granted.
Today, “no documentation” type loans are not used. And we’re not giving loans to people that simply can’t afford them. In order to get a mortgage, people have to prove, through their credit history, that they have the ability and the willingness to pay. If they don’t have the ability to pay based upon what we know as reasonable, they will not get a loan.
That’s good news, because we want reasonable and responsible lending standards. Getting back to the “Back to Work Extenuating Circumstances Program,” what are the standards that would allow someone to qualify for it?
In order to be eligible for this program, applicants are going to need to prove four things.
- First, they need to prove that they’re income declined by 20 percent or more for a six month period and that those circumstances were the result of a negative credit event.
- Second, they’ll need to be able to provide documentation if the negative credit event qualifies under the “Job lost beyond applicant’s control” category. This might include publicly available information on a reduction in workforce or that a company closed. Applicants can also look to see if they had unemployment compensation.
- Next, they have to prove that, over the course of the last twelve months, they haven’t had any credit hiccups like a late installment or any new collections or judgments.
- They also have to have a clean credit record for the last 12 months. So, they’ll need to show that they’ve had a positive rental history or that if they’re living with their parents they haven’t had any other credit issues.
- The last criteria is that applicants will have to go through Housing Counseling with an approved counselor no later than six months from the application date and no sooner than 30 days from the application date.
Sometimes people get hung up on finding evidence proving the “Negative Impact Event.” We saw the same thing when homeowners had to provide evidence of a hardship to qualify for a short sale. What kind of documentation is considered acceptable?
Internet articles, news articles or documentation from their place of employment are all acceptable. Typically people who have experienced a “Negative Impact Event,” know where to find the information that proves it occurred.
The other thing we haven’t mentioned yet, that I want to emphasize for your agents, is that this is an FHA program. So not only does somebody have the ability to get back in after a 12 month delay, they have the ability to do so with a 3.5 percent down payment if they still qualify for that loan type.
Jim, in 2009 agents had this responsibility to inform their clients of the opportunities afforded to them through the First Time Home Buyer Tax Credit. Is it the agent’s fiduciary responsibility to get the word out and let borrowers know that the “Back to Work Program” is available to them?
Without a doubt. You know, no one goes through a short sale, foreclosure or bankruptcy willingly. So now you’ve got this group with this mindset – and they were counseled by their financial or short sale advisers to prep for this – that they there was going to be a period of time before they could restore their credit to the level that would allow them to borrow again. That was going to be a period of three, four or seven years. And they reconciled with that. So now they’re not even looking for these opportunities - which is a huge opportunity for agents to step in.
What kind of numbers are we looking at in terms of people that might see some salvation?
I think we’re looking at millions of people, Jay. If you just look at the fact that 4.5 million people have gone through a foreclosure since the housing crisis, that's over 2 million people that have the ability to qualify for this program. That’s not even taking into consideration the number of short sales or bankruptcies. So if you look at the total universe of available prospects – people that could be reached – it’s quite significant. It has the potential to exceed the number of homes that will be sold this year.
Editors note: The data cited in this article is from earlier in 2013. More recent data on foreclosures, short sales and bankruptcies can be found at RealtyTrac.com
Our KW | Research team took a closer look into that and they show we are on pace to sell about 4.5/4.4 million homes in 2013 – very close to the number of people positioned to get back in the home sales game.
Which brings us to our next question. If I’m a top agent, and I’m hearing or reading about this news, how am I going to get the word out? Are there any particular methods that agents could use – that you’re aware of – to identify these people who might meet the criteria for the program?
The first and best place agents can begin is to reach out through their database. Not only are agents going to touch those who have experienced a foreclosure, short sale or bankruptcy directly, they’ll also be able to ask the question, “Who else do you know that I could potentially help that went through this and may not be aware?”
The other thing that agents can do is go and check with title companies to see what type of information they may have on people that experienced a distressed-type event. Because while we may know who the people are and we may know the address that they formerly lived at, we don’t necessarily know where they’re at today. So, cell phone numbers and email records are extremely important when reaching out to these people.
There’s also a number of agents out there who participate in radio advertising. This is a great opportunity to start sending promotional messages saying something to the tune of; “You may not have thought that you could purchase a home today. But I’m here to tell you that many of you can. Call me for information on the new 'Back to Work Program' from HUD so we can try to put you in a position to buy.”
These are some fantastic ideas to reach out and get in front of people. Where else, or who else, might you tap to uncover people who don’t know about the program?
I would definitely look to any clients that you have worked with over the last several years, particularly if they have gone through a distressed type situation. They are aware of their situation and they have a network of people who have experienced the same thing. You might also ask other people in your office if they have clients who need help. The last group I’d look at is ourselves. There's a lot of people who work within the real estate and its related industries that experienced a distressed situation and are now going to have the opportunity to participate.
Earlier you mentioned that these people might be renting. Could you farm those apartments or single family homes renters?
I don’t know how many people are aware of the “Every Door Direct Mail” that is offered through The [United States] Post Office, but it’s a way to mail to every home within a particular postal route. It isn’t broken up by zip codes, it’s actually directed to the specific mail carrier who delivers to a complex or a house. And within these postal routes, some apartments may carry above average rent rates and are lived in by people that may have moved out of their distressed situation. You can hit all of these complexes, on average, for less than 16 cents [for postage], for an 8 ½ x 11 postcard.
That’s a great idea.
Yep. So now agents have the ability to direct their targeting at that specific location and blanket everyone in there. I think it’s really going to open up a lot of opportunity to a lot of people, including those who aren’t in a distressed-type situation and want to make the jump to home ownership.
Got it. Is there anything else we didn’t cover before we wrap this up?
You know, I think the one thing that people can do is research the term “Boomerang Home Buyers,” and really focus on using that information. I think it’s really going to help agents hone in on their target market and help people. And more importantly, theyre going to have a great opportunity to direct others to that and make people homeowners again. I’m really excited about this program - it is a tremendous time for us.
Jim, I just want to say thank you, on behalf of everybody for giving us your valuable time and your expertise. I really appreciate you sharing today.
Thank you, Jay.