On the heels of our discussion about legislation to remove the Phantom Tax associated with short sales, (see my quote in the Washington post on Short Sale) there is also legislation out there to freeze Adjustable Rate Mortgages for homeowners.
I have the following questions, maybe you know the answers:
1) Will it only help those facing foreclosure, or will everyone that locked into a 2% teaser rate get the benefit of a 4-8% reduced rate. On a $300k house, this comes to up to $24,000 in savings per year!
2) Who pays for this? The banks already have calculated expected earnings based on the rate jumps. Do we expect the banks to just eat it? Or does the government write the banks a check?
3) If a $300,000 house increases in value to $400,000 in 4 years, after the government gave some a $96,000 bailout, will they be allowed to take that $100,000 profit?
What I MIGHT be able to understand is a Minimum Payment Option, but the unpaid balance be paid at the end, when the house is sold (like a minimum payment on an Option Arm).
My understanding of the proposed solution:
- 2005 purchaser pays $300,000 for a home. 100% loan. 4% rate, that adjusts to 7% in 2007.
- 2007, the government (or the bank) covers for the 3% difference ($9,000 a year)
- 2010, if the seller can sell for $330,000, after 3 years of government subsidies totaling $27,000, they PROFIT $30,000
- 2005 purchaser pays $300,000 for a home. 100% loan. 4% rate, that adjusts to 7% in 2007.
- 2007, the government (or the bank) covers for the 3% difference ($9,000 a year)
- 2010, if the seller can sell for $330,000, after 3 years of government subsidies totaling $27,000, the payback the subsidy for a PROFIT of only $3,000
BOTTOM LINE: While a measure like this might help distressed homeowners, I can see many situations where this might result in a near bankrupt homeowner suddenly PROFITING $30,000 from taking out a risky loan.
- Written by Frank Borges LL0SA- Broker FranklyRealty.com
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