Trying Again

Is a second-chance mortgage really worth it?

Las Vegans who are losing their homes in the Valley’s continuing mortgage crisis may get their second chance at the American Dream sooner than they think. In the city of second chances, this seems like a good and reasonable thing. But one day out of short sale or foreclosure? It’s gimmicky all right, but crazy as it sounds, it could work for some.

The seemingly overnight fix of buying a house right after enduring a short sale or foreclosure is a sales pitch from Las Vegas’ Premier Mortgage Lending’s “Another Chance” loan program. Through a collection of private investors and portfolio lenders, Rick Piette, principal of Premier, has access to about $200 million to lend locally. He started the brokerage a little over a year ago and most of his business is traditional conventional and FHA-backed loans. However, in 2011, he did 50 second-chance loans and hopes to double that number this year.

It’s hard not to hear about second-chance mortgages and ask, “Haven’t we been here before?” After all, “innovative” loans to iffy borrowers first inflated, then popped the mid-2000s housing bubble. But can creative financing help solve the very problem it created by goosing moribund housing markets?

Nationally, large banks haven’t jumped on board with second-chance loans, but small lenders and brokers such as Piette seem to be up for the risk. Here’s a look at the realities of this second-chance proposition.

The deal

To secure a second-chance loan, you need a 20 percent down payment; that’s cash a lot of people just exiting a foreclosure or short sale probably don’t have. On the other hand, some may be socking away cash every month while they’re not paying on an underwater mortgage. Oddly, they could march into their next home right after the foreclosure or short sale is final—if everything else on their credit is decent. And that can be a big “if.”

Too many people going through short sale or foreclosure have blown off other credit responsibilities along the way, Piette says. They’ve stopped paying HOA dues, letting liens pile up; they’ve let credit-card bills run past due; and even if they’ve gotten a new job, there’s still too much to overcome with their credit score in order to qualify.

While his second-chance loan has no minimum credit score, Piette has found a score of 600 to be the cut-off between those with a one-time housing “incident” and those who are habitual late-payers. If prospective borrowers have been good on their debt promises up to a year prior to the short sale or foreclosure, they may still be able to get the loan.

The biggest difficulty comes with the interest rate. With 30-year conventional or FHA rates hovering around 4 percent and sometimes lower, getting into a house on a second-chance mortgage will cost you 9 percent with Premier—so the sooner you can refinance, the better.

Michele Johnson, CEO of the local arm of the Consumer Credit Counseling Services, hasn’t heard of too many second-chance programs like Premier’s, and is leery of the idea in general. She encourages people to face their credit demons instead. Three years after a foreclosure or short sale, one can qualify for an FHA loan with only a 3.5 percent down payment requirement anyway.

“This [short sale or foreclosure] is not a death sentence. … Homes are still going to be affordable in three years,” she says. “How badly does one need a home right now and at what cost? That’s what it ultimately comes down to.”

Tricky math

Piette also gives scenarios where someone using his 9 percent loan can “save” $20,000 to $30,000 after five years of owning versus renting. His three scenarios use calculations on homes ranging between $135,000 and $300,000; factor in an annual 1 percent appreciation rate for five years, tax savings (mortgage interest is a tax write-off) and the assumption that one’s mortgage payment would be roughly the same as rent.

But this analysis doesn’t take into account the 20 percent down payment, which can be equal to or more than the predicted savings. Piette counters that as long as the property doesn’t drop 20 percent in value, the down payment comes back to owners when the home is sold.

It’s a sales pitch for sure, and plenty of factors need to be weighed when looking at buying now or later. If the payment and home seem right today, there will probably be plenty of takers. And at least these second chances come with a fixed rate and some level of transparency not seen five or six years ago.