After two foreclosures and two bankruptcies, Hermes Maldonado is as surprised as anyone that he's getting a third shot at homeownership.
The 61-year-old machine operator at a plastics factory bought a $170,000 house in Moreno Valley this summer that boasts laminate-wood floors and squeaky clean appliances. He got the four-bedroom, two-story house despite a pockmarked credit history.
The last time he owned a home, Maldonado refinanced four times and took on a second mortgage. He put a Cadillac and Mercedes-Benz C300W in the driveway and racked up about $45,000 in credit card bills and other debts. His debt-fueled lifestyle ended only when he was forced into bankruptcy.
His reentry into homeownership three years later came courtesy of the Federal Housing Administration. The agency has become a major source of cash for so-called rebound buyers — a burgeoning crop of homeowners with past defaults who otherwise would be shut out of the market.
"After everything that happened, thank God I was able to buy another house," Maldonado said in Spanish. "Now, it's good because the interest rates are low and there are lots of homes."
The FHA, which backs nearly 8 million loans, is helping rebound buyers recapture the American dream, boosting the housing market in the process. But that's touched off a fierce debate about the financial and ethical wisdom of bankrolling borrowers who contributed to the last housing bubble — and the potential cost to taxpayers.
The agency has suffered deepening losses in the last three years that have put it under enormous scrutiny.
Created during the Great Depression to revive the devastated housing market, the FHA doesn't originate loans. It guarantees mortgages made by banks in exchange for insurance premiums. The agency now insures more than $1 trillion worth of homes. This year it has backed roughly 14% of all mortgage originations, according to the trade publication Inside Mortgage Finance.
Critics worry that the FHA is foolishly allowing marginal buyers to get loans just three years after foreclosure with as little as 3.5% down. What's more, the agency doesn't even track how many rebound borrowers it backs.
Exactly how much money is hemorrhaging from the agency could be revealed Thursday, when the agency files a self-evaluation report to Congress. Analysts say the FHA could request a bailout from the U.S. Treasury for the first time in its history.
What's unclear is how much money the agency needs to stay afloat. The Housing and Urban Development Department, however, projects $13 billion might be needed.
"It looks uglier and uglier for the FHA," said Anthony Yezer, a George Washington University economics professor.
At a minimum, the experiences of Maldonado and other rebound borrowers illustrate how fast the financial errors of the boom are being wiped clean by government policy that is eager to give the housing market a boost.
"If somebody goes through foreclosure or bankruptcy, or whatever, you don't allow them to jump back into the housing market as quickly as three years," said Guy Cecala, publisher of Inside Mortgage Finance. "Aren't you setting yourself up for future losses ... if you make those loans to the same high-risk borrowers?"
Proponents say rebound lending is essential to the economy. This group has emerged as an unexpected source of strength for housing this year, particularly in badly scarred areas such as the Inland Empire.
Besides, advocates argue, giving people a second chance — or even a third chance — is as deeply ingrained in American culture as buying a home itself.
"It's happening quite a bit," said Doug Shepherd, owner of Shepherd Realty Group in Riverside. "It is something that is an important part of the coming market."
Home builders and real estate agents are capitalizing on this market.
Some even keep files on former homeowners who will become eligible to apply for new loans once past transgressions are cleared from their credit reports.
Greg McGuff, the Inland Empire division president for home builder Lennar Corp., said roughly 1 in 5 buyers in his region had either a previous short sale or a foreclosure. Many of them are eager to own again and often recognize the opportunity that declining prices and low-interest mortgage rates provide.
"They know to the day when the event clears from their credit history," McGuff said. "Buyers are working diligently to improve their credit scores through the use of credit repair companies, not only to meet the minimum requirements, but also to ensure the best interest rate pricing."
The FHA is trying to straddle the line between financial caution and doing what it can to aid the economic recovery.
Housing and Urban Development Secretary Shaun Donovan said the FHA has tightened its standards significantly but must still lend to those who wouldn't otherwise qualify for a mortgage. It's crucial for families to "show that they are responsible, that they have worked hard to reestablish their credit," he said.
Rebound buyers say they simply ran into bad luck during the crisis, and FHA loans have helped them get back on their feet.
Amy Novak, a real estate agent, bought a home in Riverside in 2006 and borrowed extra money to pay for needed repairs. She and her husband fell behind on payments when they lost work. They couldn't get a loan modification and walked away in 2008, she said.
"It was going to be our marriage or the house, so we left right then and moved into a rental and let the house go to foreclosure," Novak said. "We had excellent credit; we were pretty young at the time."
Late last year the couple bought a new home in Riverside with an FHA loan. Novak said she is happy to own again and is paying her mortgage on time every month.
Betty Buenrostro and her husband, Eduardo, took on a risky loan to buy their first home in La Puente in 2005. They expected to refinance out of the loan, but Eduardo lost his job when the economy soured, Betty said.
The couple used an FHA loan last year to buy a newer place not far from their previous one.
"It's a three-bedroom house, it was completely remodeled," she said. "It had a brand-new dishwasher, everything was almost all done, and right now I am just happy that I have my house."
Maldonado, who emigrated from Honduras decades ago, said he moved to Moreno Valley in the 1990s to escape the violence of South Los Angeles. He has worked at a Santa Ana plastics factory for 32 years.
He speaks English but is more comfortable in his native Spanish. Maldonado doesn't smile often, but he flashes a wide grin when describing his good fortune to own anew.
Shortly after buying their first Moreno Valley home in 1996, Maldonado and his wife began a years-long process of home refinancing to fund an expanding lifestyle, according to a review of the family's property and bankruptcy records by the Los Angeles Times.
Even after defaulting on their first home and declaring bankruptcy, the serial refinancing increased significantly after they bought a second home with a high-interest, adjustable-rate loan from a subprime lender.
Maldonado said his financial woes stemmed from the illness of his mother abroad. But he will also attest to living beyond his means, which records confirm.
Maldonado readily admits his past mistakes but says he has learned his lesson.
"Yes, yes," he said. "Leave behind the credit cards, don't take out a second mortgage. Live with what you can, and don't spend more than you earn."
Times staff writer Jim Puzzanghera in Washington contributed to this report.