The Government Wants You To Buy A New House

Even though all of the news has lately been about the big federal bailout of the financial sector

, are homeowners aware 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 lower monthly payments.

Too many homeowners are not able to keep up with their mortgage payments, even if they could initially afford them, after the ARM (Adjustable Rate Mortgage) reset to a new, higher rate.

There is one problem with the program and that is that it permits the lender to decide whether or not he wants to participate in it for the borrower. They may be willing to do so if the only other solution to renegotiating is to let the house go into foreclosure. Logically, it would seem better to lose some interest than the whole loan principal.

This is the concept behind the program: Many borrowers used ARMs in order to take advantage of temporary low interest rates. Once rates went up, a borrower would attempt to renegotiate at the best rate. At the same time, the value of the house was probably falling, leaving a lower equity in the home to be able to obtain a new loan.

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. Now that so many people have no or even negative equity in their property, they cannot refinance.

Programs built to help homeowners will give the lender a guarantee on the new mortgage. The kick in the deal is that the new loan not be for greater than 90% of the market 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 bank, though, would be guaranteed that the $171,000 would be paid. This is the choice that they have to make: an immediate small loss or a longer term risk of total loss. Some banks seem to think not. Many lenders do not appear to be willing to take this immediate loss.

This may seem strange, but accounting may be the reason for it, since a home, even if it is in foreclosure, still shows as a balance on the books of the bank, but a loss would have be reflected immediately. Sad to say, banks can be short term thinkers and would rather delay the pain instead of showing a loss on the balance sheet.

Many homeowners can really benefit from such a program, especially if the assessed value of their home has not gone down too much. It is likely that borrowers who do have some equity in their houses will have a better chance of getting a renegotiation, since there will not be such an extensive loss for the bank.

by: Sean G. Lemoine

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