There is a tsunami of wrecked credit that has only begun to hit the credit reporting bureaus.
Many of the victims are those whose FICO and credit scores have been demolished by short sales and foreclosures. With the short sales, or short pays as they are sometimes called, the mortgage lender has agreed to accept less than what is owed on the home–and where more is owed on the home than what it is worth. In the case of foreclosure, the home is auctioned off for non-payment. In both scenarios, credit scores of the former homeowners are generally ruined, which will likely prohibit them from purchasing another home anytime in the near future–or perhaps for years to come.
Many will argue against the idea, but perhaps it is time to consider credit amnesty for those who have lost their homes to foreclosure and short sales. Sure, there were those homeowners who were greedy, who used their homes as ATM machines, who foolishly thought the crazed real estate market would continue forever–or at least until they managed to sell at the top of the market.
We have even met a few of those people. They are among the legions who followed real estate flipping shows and late night television gurus. They followed the promises of big and easy money.
But most of the defaulted clients we counsel have a history of home ownership, pay their bills on time, and were lured into mortgage financing that was so easy to obtain and which offered irresistible terms. Most relied on the counsel of a loan broker or real estate agent (often one person who wore both hats), who assured them of the wisdom of such loans.
It was a diabolical match: Gullible and sometimes greedy homeowners paired with greedy and sometimes crooked mortgage and real estate professionals.
The finger pointing can go on for years, but very soon there will be tens of thousands of people who will no longer be able to purchase homes. Add these numbers to the huge pool of buyers who are already afraid to enter the burgeoning real estate market and we have an economic problem of near-Biblical proportions.
I’m not sure how the details of a credit amnesty plan might work (and the devil always lurks in the details), but something need to be done quickly to help bolster buyer capability in this market. To disenfranchise such a large group of home buyers will only magnify the expanding real estate market glut and lengthen its recovery.
And as with any amnesty plan, there will be a percentage of borderline criminals who are more deserving of jail than being forgiven.
But with tougher mortgage loan underwriting, better oversight and raising the bar on real estate and mortgage lending professional standards, the rotten borrowers would be weeded out. This would also encourage the discouraged to stay current with their other debt obligations instead of giving up entirely on their FICO scores and future home buying opportunities.
It might be a solution that could help our markets recover–and credit amnesty just might offer hope to the hopeless. Might not the rewards outweigh the costs?