Passage of the Housing and Economic Recovery Act of 2008 (HERA) H.R. 3221 may offer some hope for homeowners facing situations that may lead to foreclosure. Since the vast number of foreclosures is having a negative effect on home values preventing even more homes from going into foreclosure may help to stabilize prices and restore confidence among potential homebuyers. At least this is the intent. To see the effect of foreclosure sales on the Jacksonville home values check out my "Jacksonville Florida Real Estate Market Trends" page.
One component of H.R. 3221 designed to reduce the number of foreclosures is the HOPE for Homeowners Act of 2008 (FHA Foreclosure Prevention Refinancing Program). One key provisions of the act is to authorize the FHA to insure refinance loans for distressed borrowers. This sounds OK at first but lenders who hold the current mortgage would have to agree to accept only 90% of the appraised value as payment in full. Not such a good deal for them. Basically the distressed borrower will be able to reduce the amount of the original loan to 10% below the current appraised value. These loans will also have fixed rates. This is a great deal for the borrower. For more details click HOPE for Homeowners Act of 2008
What about the responsible borrowers who have made sacrifices and lifestyle changes in order to continue to make payments as promised to the lender? What's in it for them? Well they get a pat on the back and the satisfaction of knowing they did the right thing. They will also benefit from the stabilization of home values that should result from the removal of foreclosures from the market. Many responsible homeowners who would like to refinance to take advantage of record low interest rates find that they do not have enough equity to qualify due to falling home values. Also, should responsible homeowners need to sell their home they won't be competing with foreclosure sales.
What's in it for the taxpayer? The FHA will get to keep a portion of the equity if the home is sold within certain time frames. From 100% of the equity if the home is sold within one year up to 50% of the equity if the home is sold after 5 years. There will also be a 3% up front mortgage insurance premium due at closing and an annual mortgage insurance premium of 1.5%
I believe that irresponsible behavior and decision making is what leads to most foreclosures. In effect this program rewards that irresponsible behavior. Psychologists will confirm that behavior that is rewarded gets repeated. If that is true then the HOPE act of 2008 will probably evolve into the Renewed HOPE act of 2010. Is this program destined to only serve to prolong the inevitable? We shall see.
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