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STUDY EXAMINES HOMEOWNERSHIP AFTER FORECLOSURE If one loses his or her home to foreclosure, the waiting period to qualify for another mortgage can easily be another decade. According to a report from the Federal Reserve Bank of San Francisco, a mere 10 percent of borrowers with a serious delinquency in their credit history were able to obtain a mortgage again within 10 years. Subprime borrowers, or those with credit scores lower than 650, have an even more difficult time returning to the market. Borrowers who terminated their mortgage for a reason other than default were able to access mortgage credit about two-and-a-half times faster than those who went into default. The San Francisco Fed's analysis was based on Equifax data in the New York Federal Reserve Bank's consumer loan files. Mortgages were counted as being in default if they were either 120 days past due or were reported to have a charge-off or foreclosure. The timeline for credit accessibility varied, however, when observing the rate of return based on different years. In 2001, 30 percent of borrowers who defaulted were able to take out another mortgage within 10 years. In 2008, the rate of return was much slower. For example, after almost four years, the rate of return for borrowers in 2008 was about 5 percent, but in 2001 during the same period, it was above 15 percent. The authors of the report, William Hedberg and John Krainer, attributed the low rate of return in 2008 to lack of demand. In the early 2000s, demand for housing was strong, but following the Great Recession, uncertainty about jobs and income may have caused people to become "unwilling or unable to demand housing," they explained. 30 While borrowers with prior defaults are influenced by conditions such as unemployment and home price growth, the report said, "the best predictor of when a defaulting borrower returns to the market is the change in the borrower's credit score." The researchers found that a typical borrower who experiences foreclosure will have a credit score below 600, no matter what their score looked like prior to the derogatory mark. But after five years, the report said, "borrowers who return to the mortgage market after a default have experienced a more-than-100-point increase in their score." With an estimated 4 million foreclosures since 2007, the movement toward homeownership will be a gradual one for millions, according to the Fed report. The Census Bureau says the nation's homeownership rate remained near historic lows at 65.5 percent during the third quarter of this year. The only time it's been lower was in the first quarter of 1997, when the rate sat at 65.4 percent. Paul Diggle, U.S. economist for Capital Economics, projects a worsening rate. "We think that continued tight credit conditions and plenty more foreclosures could see the homeownership rate fall slightly further yet," Diggle said. Even though the rate is projected to decline, Capital Economics expects the recovery to continue with investors leading the way. "Indeed, it's hard to escape the conclusion that the sustainability of the housing recovery depends on how robust investor demand proves to be. Our view is that, for the next few years at least, institutional and individual investor demand will hold up well," Capital Economics stated. FHFA EXPECTS TAXPAYER COST FOR GSES TO DECREASE The projected cost to taxpayers to preserve the profitability of Fannie Mae and Freddie Mac is lower now that the GSEs are not expected to draw from Treasury to pay dividends and home prices are increasing, according to a report from the Federal Housing Finance Agency (FHFA). So far, the GSEs have drawn $187.5 billion from Treasury. When assessing potential Treasury draws under three different scenarios, FHFA projects Treasury draws will range from $191 billion to $209 billion at the end of 2015, or an additional five to $22 billion in support. When subtracting dividend payments from the draws, the net amount is $67 billion to $138 billion. In October 2011, the cumulative projection was $220 billion to $311 billion through 2014. According to FHFA, Fannie Mae would not require additional draws after 2012 in two of the three scenarios, while Freddie Mac would not require additional Treasury draws after 2012 in any of the three scenarios. FHFA explained Fannie Mae's book of business is about 50 percent higher than Freddie Mac's, leaving Fannie Mae with higher cumulative draws. In addition, under the best-case scenario, the GSEs would pay additional dividends of $78 billion; they'd pay in $32 billion for the worst-projected outcome. According to the report, the projections are revised based on changes in outlooks for "house prices, interest rates, trends in borrower behavior, and amendments to the terms of the PSPAs [Preferred Stock Purchase Agreements] between Treasury and each of the enterprises." Changes made to the PSPAs replaced 10 percent dividend payments to Treasury on senior preferred stock with a quarterly sweep of net worth, ending the need to draw from Treasury to pay dividends. FHFA noted actual outcomes may be different than the agency's projections, and the projections are based on "what if" exercises and "do not define the full range of possible outcomes." KNOW THIS The number of mortgages past due totaled 5,640,000 at September month-end, Lender Processing Services reports.

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