Owe more than your home is worth? There's HOPE. (FHA Bailout 2008)

The other day I picked up a for-sale brochure from a home across the street. It was no surprise to see it listed for $150,000 less than what mine appraised for 2 years ago. Nothing new. This is the same old story that we've heard for the past year and a half. But now it is becoming increasingly common for me to see principal loan balances that are substantially higher than what their collateral properties are worth. Presently, a homeowner in this upside-down dilemma has the following options:

1. Continue making the mortgage payment in hopes that the market will recover.
2. Negotiate with the lender for a work out agreement (a.k.a. loan modification).
3. Sell the home for less than what is owed to the lender (a.k.a. short sale).
4. Walk away.

For the person with an adjustable loan, option #1 may be feasible so long as the fluctuating payment remains affordable. Since it is next to impossible to refinance an upside-down home, option #2 is the next best alternative. But due to a backlog of requests, 90+ day late cases have become the lenders' top priority, which makes loan modifications more difficult to close. To exercise option #3, one must wait for a serious buyer and then negotiate with the lender(s) to settle for less than what is owed. Unfortunately for many Americans, there is very little time and money, so option #4 has been an exceedingly popular choice. I am not writing this blog to tell you how bleak our housing situation is, but rather to give some troubled homeowners a reason to stick things out just a little while longer.

You may have heard of a government rescue plan designed to slow down the rate of foreclosures across the United States. Its short name is the "FHA Housing Stabilization and Homeownership Retention Act of 2008." Essentially, it encourages lenders to REDUCE principal loan balances, which will give homeowners real incentive to continue paying on their homes. Here are some brief bullet points taken from the proposed plan:

• A lender must be willing to forfeit any amount owed above true market value PLUS an additional 10% equity.
• FHA will guarantee the new loan amount, up to 90% of a home's true market value, on a 30yr fixed rate.
• Borrowers must occupy the residence as their primary home AND be able to provide sufficient income documentation that proves they can make the new monthly payments.

What's the catch?

• A borrower must pay an extra insurance premium to FHA for backing the loan.
• Future equity must be shared with the government if the loan is refinanced or the property is sold. The split would be the greater of 3 percent of the new loan amount or 50 percent of the profits on the sale.
  

If I may speak directly to those people who this might benefit: It's not a bad deal at all, especially if you could end up owing substantially less than what you do now. On top of that, you get a fixed rate, a reduced payment, and a real chance to payoff your home in 30 years.

Who stands to benefit?

The Congressional Budget Office estimates that up to 500,000 U.S. homeowners would qualify for the program.

Why are they doing this?

There is very little that the free markets can do to correct our credit and housing problems in our nation. Without immediate government intervention, the rate of foreclosures may rise faster than our fragile economy can handle, which can only lead to further devaluation of U.S. homes and an economic recession.

When is this going to happen?

On May 8th, the House passed this bill on a 266-154 vote. On May 20th, the Senate Banking Committee passed their similar version of the plan by a 19-2 vote. They hope to have this bill up for a full Senate vote and in front of the President before July 4th. If things go as I hope, this bill will become law by October 1st.

How can you participate?

Given that lender participation in this plan will be completely VOLUNTARY, I expect that this will involve intense negotiation through loss mitigation efforts with lenders. Borrowers will need assistance to convince banks that it makes financial sense to write-down the balances on their loans. If you or anyone close to you could benefit by re-gaining some real equity, please email me a quick response. We can get a head start by 1) assessing your qualifications for this program; 2) evaluating the net write-down benefit on your loan; and 3) calculating your new future payment. I look forward to hearing from you.

Hope all is well,

Randy Miguel
Associate Broker, Equitas Capital