There has been a lot of news about bailouts, but they mostly refer to bailouts of big firms, and a bailout of small borrowers has been ignored, but came into effect on October 1, 2008. “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 lower monthly payments.
There were a lot of mortgages issued over the last years, when credit was very available, that were at low adjustable interest rates just to get the borrower able to buy a home, but when rates went up, those homeowners could no longer afford their mortgages.
The one big issue 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. Perhaps the designers of the program believed a lender would prefer to have some guarantee on a loan if there was danger the borrower could no longer pay. Logically, it appear seem better to lose some interest than the whole loan principal.
Here is how the program is organized: There are many borrowers who obtained ARMs that, at reasonable rates, were 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 houses have no equity with which to pay off the old loan.
For example, if you purchased a home for $250,000, and your loan balance is still $215,000, but the home is now only worth $190,000 because the housing market has fallen. Now that so many people have no or even negative equity in their property, they cannot refinance.
Hope for Homeowners can guarantee the repayment of the new loan to the bank, with one big caveat. The guarantee cannot be for more than 90% of the home’s value. This means, in our above case, that the homeowner can only borrow $171,000, and the bank would have to have a loss of over $30,000. The lender knows he will receive $171,000 in case of default, however. Is it better to accept this loss and be assured of the whole principal being repaid? Each bank has different ideas on this. It seems manychoose not to participate and continue to risk foreclosures.
There may be a rationale for this in the accounting mechanism, because a foreclosed property still is an asset, while the $30,000 is immediately written down as a loss. Sad to say, lenders can be short term thinkers and would rather delay the pain than show a loss on the balance sheet.
But that should not prevent any homeowner from making the inquiry and taking a chance on renegotiating more favorable terms on a smaller mortgage. If a homeowner still has decent 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 buyer.
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