After talking to our office's mortgage professional, it is not totally clear yet whether most lenders will participate in this program or not. The example of how this might work, as I was told, would be if a homeowner had an ARM loan at $250K, and the payments recently went up and they were struggling, they might be able to refinance into a loan for 90% of the homes value today, so if the home is only worth $200K today, they could refi at $180K, and the balance of the loan is forgiven. That is IF the lender decides to allow it. They will look at paystubs and see if they've been behind on the loan from the get-go or only recently due to an ARM or something along those lines.
However, if the borrower turns around and sells in 2 years and the market has rebounded, any profits will have to be repaid to the bank up to the amount forgiven first. I'm also not clear on whether this type of program will affect a lender's credit scores or not the way a short sale might.
HOPE FOR HOMEOWNERS ACT OF 2008
http://www.wsls.com/sls/business/consumer/article/hope_for_homeowners_act_of_2008_qa/14885/
By DAVE CARPENTER
AP Business Writer
Published: July 29, 2008
Questions and answers about the Hope for Homeowners Act of 2008, passed by Congress last weekend to try to steer as many as 400,000 struggling homeowners away from foreclosure:
Q: What exactly will the legislation do?
A: It will allow those who qualify to cancel their old mortgage loans and replace them with 30-year fixed-rate loans for up to 90 percent of the home's current value. The FHA will insure a total of $300 billion of the loans over a three-year period.
But the decision on whether to write such a loan remains up to banks, which would have to be willing to take a loss on the existing loans in exchange for avoiding an often-costly foreclosure.
Q: Who is eligible?
A: Eligible borrowers must have spent at least 31 percent of their monthly incomes on their mortgages as of March 1, 2008. The troubled loan must have originated no later than Jan. 1, 2008, and be on the borrower's primary residence. And the borrower's income must be verified.
Q: When does the program start?
A: It takes effect Oct. 1 and runs through September 2011, although the FHA isn't likely to have it operating at full capacity until next year.
Q: Since lenders can pick and choose which loans to refinance, how can consumers determine if theirs will be selected?
A: Check with the bank or financial company servicing your mortgage, but it may be weeks before they make decisions concerning the new guidelines and assess individual loans. Even then, keep expectations limited. "Servicers are going to be reluctant to take the government up on their offer," predicted Mark Zandi, chief economist at Moody's Economy.com. "The earliest they'll start taking them up on it is early next year. And even then it's likely to be modest."
Q: Is there anything a homeowner can do to improve chances of benefiting from the program, such as crunching numbers to make a case for the bank?
A: Not really. The best step is to keep up your payments as best you can.
Q: But doesn't this provide an incentive to NOT pay your mortgage, if you're barely keeping ahead of bills and are underwater on your house, so you can qualify?
A: No. If your situation deteriorates enough, the bank may reject any possible new loan.
"Turning yourself into a financial basket case is not going to work," said Dan Seiver, a finance professor at San Diego State University. "If you turn into a complete deadbeat, the servicer is going to just foreclose and dump it."
Q: So what should I be doing now besides trying to keep up with payments?
A: Talk to a local credit counselor and call the toll-free hot line of the Hope Now alliance - an industry group trying to coordinate a response to the mortgage crisis - at 1-888-995-HOPE. It is available 24 hours a day to provide mortgage counseling in multiple languages. Mary Thomason, director of resource development for The Impact Group of Atlanta, a housing counseling group, also suggests tracking expenses and income closely in order to be able to forecast your cash flow for the next six months and give yourself better control of your finances.
Q: If the banks and lenders refuse to write these loans, then what?
A: Public and political pressure may prompt them to participate. If not, and more people continue to lose their homes, Zandi says the next White House administration subject them to additional regulations or investigations if they remain unwilling to take on the risks.
Q: What happens if I'm able to sell my home after I refinance?
A: You must agree to share any profits from the resale with the government based on a sliding scale, and FHA must be repaid the equity.
Q: Where can consumers find more detailed information about the plan?
A: There is a six-page summary of the housing act at http://banking.senate.gov/public/-files/HousingandEconomicRecoveryActSummary
3.pdf and the FHA's Web site at http://www.fha.gov is a place to watch for updated information.
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