Tuesday, July 29, 2008

Hype or Hope for Homeowners

There are some great posts on how good or bad the new mortgage relief/housing rescue bill is. Check out Bergen Foreclosures insight onto this long, long bill here.

But now we are at a different point - now that the the huge 700 page housing rescue bill is about to become the law of the land - we need to know what is in it. Is it really going to help? Let's take a look at an article form the Hartford Courant called Tips For Homeowners on Understanding Sweeping Mortgage Bill.
The most sweeping mortgage relief legislation since the Great Depression is expected to be signed by President Bush now that it has been passed by Congress. The centerpiece of the housing package — HOPE for Homeowners — could provide as much as $300 billion in government-backed refinanced mortgages.

The program could help as many as 400,000 homeowners across the country facing foreclosure — more than 3,700 of them in Connecticut.

Wow, that sounds huge. $300 billion to help 400,000 - but that averages out to only $750 per homeowner. Is that really going to help? It seems like it is designed to help lenders unload $300 billion of mortgages rather than homeowners.

Just our take but lets move on -
HOPE for Homeowners is voluntary, however, and both lender and borrower must agree to participate.

So everything is voluntary? We can see why the lender wants to dump loans - especially ones that look like they will be in trouble soon. Other than another $300 billion to dump onto the government what is so different with this part and our wonderful HOPE Now . And if a lender does volunteer what do they have to do?

Lenders must agree to take a loss comprising the difference between the mortgage balance and 90 percent of the home's current value. Lenders also must make an upfront payment to FHA amounting to 3 percent of the principal, to get out of the loan.

So lenders can sell a loan of up to 90% of the current price (wonder who will be appraising the "current" price with the housing values still in freefall). Then they pay 3% of that principal to get out of a loan. So lets look make up an example house currently valued at $100,000 in Camden. The lender can sell a mortgage valued up to $90,000. Now the lender has to pay the FHA $2,700 to dump the loan onto the FHA. Hmmm. Not a bad deal to dump houses in areas that are projected to decline significantly. There will be a line of lenders to do this. Get those projected future foreclosures off the books now rather than dealing with an REO. There is definitely some incentive for lenders.

Now lets take a look at the positives for the borrowers -
Borrowers must live in the home, and the mortgage must have been originated on or before Jan. 1, 2008. Borrowers must demonstrate they can't afford the mortgage and certify that they have not intentionally defaulted. Monthly mortgage payments, including principal, interest, taxes and insurance, must be at least 31 percent of monthly income, as of March 1, 2008.

All loans will be 30-year, fixed-rate mortgages and must be made through FHA-approved lenders. A borrower can choose to refinance through a different lender. Borrowers' income must be deemed sufficient to cover the new loan. They must provide verification of income and cannot have any additional mortgage debt, such as a home-equity loan.

If the home is sold or refinanced within one year, the homeowner must pay the FHA all of the profit. The borrower gets to gradually keep a larger share of the profits until, after five years, the borrower's share is capped at 50 percent.

Borrowers must pay an annual insurance premium, amounting to 1.5 percent of the principal. The payment must be rolled into the monthly payment.

First the lenders has to pay 3%, now the borrower has to pay a 1.5 premium insurance, annually. So for our Camden example the $90,000 loan has to pay another $1350 per year, averaging out to $112.50 per month, for the life of the loan. That is on top of regular insurance, taxes and the new principal and interest payments. From our example this new insurance is the equivalent of paying an interest rate of 1.83 points more per month. Wonder where this insurance money is going?

While we like the idea of having homeowners in the standard 30 year fixed mortgage. Safe and reliable monthly payment is a good thing for many homeowners. This new insurance premium sounds pretty expensive. Much more to this than meets the eye.

From everything we know so far it just looks like a convoluted method to bailout the lenders with a few happy homeowners to show as examples. What do you think?

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