I have been thinking about “credit scores” in relation to the housing market and any kind of recovery we hope to see.
Everyone is touting 2K10 as the year of the short sale. I would agree that it seems to be heading in that direction. There are going to be hundreds of thousands of short sales. People who can’t pay on a loan even if modified to a 0% rate will be in this group.
But in my opinion the larger contingent will be people who don’t qualify for a modification but could sustain the payment and people who no longer want the property because they are so far underwater. Short sale is likely to be their solution of choice.
Now perhaps things will change this year but right now most lenders will not talk short sale until the borrower is behind in their mortgage. Add to that the hit the borrower takes with a short sale (less then with a foreclosure, but a big hit none the less) and you will have hundreds of thousands, even millions of short sale sellers that will not be able to become buyers again from two to seven years because of their credit score and record of a short sale.
These are people who can afford to buy homes. They have ample income to support a purchase and have — or had — excellent credit save the blemishes caused by the short sale process.
Unless something is done to allow these qualified buyers back into the market sooner than 2-7 years, who is going to buy the REO, short sales and deeds-in-lieu after we go through all of the first time buyers?
There will, of course be a strong investor market, but they must buy at a discount in order to make it profitable. That will keep prices down and will prevent the market and price recoveries the economy needs to advance.
In my opinion the credit scoring agencies and the lenders will have to come up with a better litmus test for qualification. Low credit score from a short sale should trigger a loan reviewer to look more closely at the other factors such as income stability, debt ratios and previous credit history before summarily turning down a loan application from a qualified buyer who did a short sale.
If we do that, we will bring in a huge population of buyers who will be able to buy at retail prices and that will reduce inventory and keep values at a reasonable level.
Cary Sternberg is the president of Excellen REO.