Even though all of the news has lately been about the big federal bailout of the financial industry, do homeowners know that there was a rescue plan passed to help them? “Hope for Homeowners” was designed to help certain qualifying homeowners to be allowed refinancing out of a variable rate and into a fixed rate loans, with more manageable monthly payments.
Since many mortgages were granted with teaser rates that made the mortgage payment affordable, when the rates reset to normal or even higher than normal rates, some people will not be able to afford their monthly payments.
The one big problem with the Hope for Homeowners bill is that it is up to the lender to determine whether the borrower will be moved into a different loan structure. They may be willing to do so if the only other solution to renegotiating is to let the house go into foreclosure. Better to lose some interest income than the whole principle.
Here is how the program is intended to operate. Borrowers obtained mortgages at low adjustable rates, and this made their monthly mortgage payment affordable. When the rate went higher at the reset point, the borrower could decide to pay off the loan and lock into a newer long term rate. Today, however, more and more homes have little equity with which to pay off the old mortgage.
Let’s say a borrower took out a loan for $250,000 and still had a loan balance of $215,000 when the ARM reset; his home, however, is now only worth $190,000. This kind of reverse equity in the loan gives the borrower no option but to reset, even at a higher rate.
The Hope for Homeowners bill will guarantee the repayment of the loan to the bank. The guarantee cannot be for more than 90% of the house’s value. So now the lender has to decide to accept the guarantee for only $171,000, in the case we use, and therefore a loss of $30,000. On the plus side, the lender is guaranteed that he will eventually receive the $171,000 in case of loan default. The decision the bank has to make is if it is better to accept the loss and have a long term guarantee. Some banks would rather not. Many still seem to prefer foreclosure rather than to take the present loss.
Accounting rules may be responsible for this reluctance, since foreclosed properties remain on the lender’s books as an asset, while a write down such as this is an immediate loss. Most bankers don’t purposely want to bring down the value of the income statement of their bank.
There are some, however, for whom the loan may work, if there has not been a big reduction in the value of their homes. If a homeowner still has some equity in the home, the bank will not be taking as great a chance, and will probably be willing to renegotiate better terms for the homeowner.
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