Written by: Michael O. Wells
There was a recent article in the the Washington Post titled: House Lawyer: New Federal loan guidelines ease the sting of “zombie foreclosures” (http://www.washingtonpost.com/realestate/house-lawyer-new-federal-loan-guidelines-ease-the-sting-of-zombie-foreclosures/2014/09/25/bd45bec4-4003-11e4-b0ea-8141703bbf6f_story.html).
A “zombie foreclosure” is when a house is surrendered by the borrower, such as in a Chapter 7 bankruptcy filing, and the lender delays and delays moving forward with a foreclosure. The title to the home stays in the borrower’s name until a foreclosure sale. This can be problematic, but the most pernicious effect of the “zombie foreclosure” is how it affects the debtor’s ability to seek new financing after the bankruptcy. According to the article:
“Fannie Mae and Freddie Mac have established waiting periods. For example, previous Fannie Mae and Freddie Mac guidelines required a borrower to wait four years after a Chapter 7 or 11 bankruptcy and seven years after a foreclosure to become eligible to borrow money on Fannie Mae/Freddie Mac conforming loan terms.”
The problem is, the seven years waiting period only starts when the foreclosure happens, not from the filing of the bankruptcy, or even from the date of the discharge. If the lender does not foreclose for months or years, getting Fannie Mae/Freddie Mac loan approval could be in limbo for a long time. But new federal guidelines have changed the rules, and these rules stop the “zombie foreclosure” monster in its tracks, by applying the bankruptcy waiting period instead of the seven-year period. Again, according to the article, “Borrowers can now get back in the home-buying game in as little as two years, [William Rozek, a loan officer with Embrace Home Loans in Rockville] said, “so long as I can document their extenuating circumstances that their loan debt was discharged in the bankruptcy, that the bankruptcy and foreclosure are disclosed on their new loan application and appear on their credit report.”
Current waiting periods without extenuating circumstances are as follows:
• Bankruptcy Chapter 7 or 11: four years.
• Bankruptcy Chapter 13: two years from discharge date or four years from last dismissal date.
• Multiple bankruptcy filings: five years if more than one filing in past seven years.
•Foreclosure: seven years.
•Deed in lieu, short sale, charge-off: four years.
These waiting periods, as suggested in the article, are dependent on whether the borrowers can establish “extenuating circumstances”. It is up tp the borrower to be able to provide a letter explaining the circumstances, and providing documentation of the circumstances. Divorce, job loss, medial reports and bills, and other documents that support the claim of a hardship will be required.
If extenuating circumstances are established, then the waiting periods are much shorter:
• Bankruptcy Chapter 7 or 11: two years.
• Bankruptcy Chapter 13: two years from discharge date or two years from last dismissal date.
• Multiple bankruptcy filings: three years from most recent dismissal.
• Foreclosure: three years.
• Deed in lieu, short sale, charge-off: two years.
These changes are a welcome relief for those who have had to file bankruptcy when they faced with overwhelming life issues. Many clients tell me that they had always heard that they would not be able to buy a home in the future after filing, or would have to wait ten years. The new guidelines should help ease the minds of many who are facing difficult days and are contemplating filing for bankruptcy protection.