Short sales and foreclosures make lenders wary

Date: June 22, 2020

Banks aren’t seeing an increase in loan applications from borrowers with previous short sales and foreclosures, but executives still see those borrowers as a significant risk in spite of an improving real estate market, according to a survey commissioned by VantageScore Solutions and conducted by SourceMedia Research.

The survey included 250 professionals at financial institutions of all sizes, working in multiple departments and representing a cross-section of the lending industry.

Survey respondents said that between 1 and 20 percent of mortgage loan applications are from borrowers with short sales or foreclosure records in their credit files, a proportion that most said has remained steady over the past 12 months.

Moreover, less than 10 percent of respondents reported having approved a loan for a borrower with a previous short sale or foreclosure in their credit history.

Concerned over boomerang borrowers

Lending professionals in particular are concerned about the risk profiles of consumers deemed to have pursued strategic defaults. Eighty-five percent of respondents characterize consumers who pursued strategic defaults as increased risks, even if those consumers can meet the institution’s other lending criteria. More than half of those surveyed also said they are not likely to approve consumers who pursued strategic defaults for a mortgage loan in the next 12 months.

The survey responses suggest that so-called “boomerang borrowers,” a term used to describe prospective mortgage borrowers who experienced either a foreclosure or short sale during the mortgage crisis, face an uphill battle to become homeowners again in the next 12 months.

“There has been some speculation recently that boomerang borrowers are returning to the housing market; however, this research shows that the trend is very much in its infancy, if it exists at all,” said Barrett Burns, president and CEO of VantageScore Solutions. “There could be many reasons that lenders remain wary of mortgage loan applicants who previously experienced a short sale or foreclosure, and they must make the right choices based on their portfolio strategy and risk tolerance. One of the keys to help mortgage lenders become more comfortable with taking on added risk is a more robust secondary market.”