Bradenton / Sarasota - The bailout plan (Emergency Economic Stabilization Act of 2008) was signed into law on Oct 3 2008. Many current homeowners who are in trouble of paying their mortgage look for it as a relief to their situation. As many of them purchased at inflated 2005, 2006 prices owe more than the home is worth now, are practically "caught" in their home.
Depending on the individual situation, short sales brought substantial relief in the past, but on the contrary meant that they had to leave their home before the deal was closed.
Homeownership in the US is more than in other countries considered a basic right for many. So leaving your home makes people deperate and look for other ways to solve the situation.
Will the bailout help me as a homeowner keep my home?
You have to analyze the situation first and find the reasons how you could come into this situation. Current law already allows judges to adjust the principal of mortgages. In the past judges were tight to only adjust the rate. So theoretically a judge can lower the principal which leads to lower payments and would even allow a sale at a lower sale price without the short sale scenario. But can that really help?
The question should be: What were the reasons which led to the individual situation?
The bailout will not help those who cannot affort it!
As a general rule you can not survive when you spend more than 50% of your income on housing. Generally speaking a mortgage costs about $600 - $800 a months per $100,000 owed. So if you go by this rule, somebody making $2000 a months should not live in a $300,000 house.
The only reason somebody making $2000 could live in a $500,000 home in the past was because as prices of homes and its appraisal values increased dramatically people could refinance at a higher level. Most of time some of this money, if not most, was used to cover closing costs and monthly payments afterwards. So basically the "regular" income was not even used to cover mortgage expenses.
The evil of the "leverage effect"
With home prices increasing at double digits after 2004, people we suggested by banks and brokers to purchase homes which were obiously oversized for them. They told, "the price will go up, don't you want to participate?" So people were suggested buying a 5 bedroom house instead of a 3 bedroom. Brokers sold it as a win-win for everybody: Their commission was higher and the homeowner could use the leverage effect by lending more money for an appreciating asset. However what nobody told, the risk and burden led only by the homeowner as he was responsible for the loan with his full assets.
This worked for some time, made some pretty rich. But like any pyramid scheme, once this started failing most were left behind.
And there are further effects:
Oversized home = You pay more in taxes, more in maintenace and more in energy.
All this permanentely for ever, due to the fact that you live in an oversized home.
While a 5 bedrooms is suitable when you have 3 kids at home, it looks pretty oversized for a retired couple on a fixed $2000 income living in a $600,000 house.
Where is the help?
Congress already put a similar HUD program Hope for Homeowners into law. This program can bring relief to homeowners which satisfy all of these criterias:
- Long term affordability
- No investor bailout
- Equity sharing
- Voluntary lender participation
If you qualify, the old loan(s) would be wiped out and you can refinance at a special H4H backed loan at 90% of current appraisal value.
Consequentely these scenarios would never qualify at all:
- Investment, including most second homes
- Payment to income values over approx. 40%, i.e. if you had to spent more than 40% of your income on mortgages
In addition to that, the plan includes that all positive appreciation of the home (over the 100% appraisal value) in future would be shared with FHA at 50%.
Although there are not yet all specific rules about the new bailout out, it looks like the rules will mostly match those of Hope for homeowners program. They only difference will be that the program is offered to all borrowers instead of a voluntary participation.
If you are living in an oversized home and your income does not and will be sufficient to cover the payments of even a reduced mortgage you will not benefit in any way from this program. Moreover as prices for energy and taxes will not drop significantly you are just spending your future.
Short Sales will be the main beneficiaries of the bailout.
As banks are forced to help instead of granting something voluntarily, the position of homeowners will improve. A successful short sale will bring people much faster back on track.
If you are in trouble, there is no reason not to starting taking care of yourself now. Engage an honorable advisor to bring you back on track.
Axel Weiss, MBA Broker
Weiss & Weiss International Realty
Bradenton, FL 34205