There are Great Programs Out There for New Homeowners
by Jaimie M. Bergman
Headlines have recently concentrated on the $700billion bailout program, but how many homeowners are aware that a bill passed last year to help them became effective on October 1, 2008? This new program, named “Hope for Homeowners” is meant to help homeowners threatened with very high reset rates on their variable rate mortgages.
There were a lot of home loans issued over the past few years, when credit was very available, that were at low adjustable interest rates just to get the borrower able to buy a home, but when rates went up, those homeowners could no longer afford their home loans.
There is a problem with the program and that is that it permits the lender to determine whether or not he wants to participate in it for the borrower. It would seem sensible that they would decide to participate if the alternative would be to foreclose on the house. The bank’s loss could be much less in this case.
Here is how the program is organized: Most borrowers used ARMs in order to take advantage of temporary low interest rates. But if the rate went up, the homeowner would want to see about renegotiating the mortgage alberta mortgage broker. But with declining housing values, there is often not enough equity in a home to be able to refinance the maturing loan.
For example, if you purchased a home for $250,000, and your loan balance is still $215,000, but the house is now only worth $190,000 because the housing market has fallen edmonton mortgage rates. This kind of negative equity in the loan gives the homeowner no option but to reset, at whatever rate.
The Hope for Homeowners bill will guarantee the repayment of the mortgage to the bank. The problem is that the loan guarantee is for no more than 90% of the value of the property. In the borrower’s case, shown above, the bank would have to accept a guarantee of only $171,000, a loss of more than $30,000 on the loan. The offset argument is that now the bank knows it will receive this $171,000 rather than risk losing the whole $215,000. The decision the bank has to make is if it is better to take the loss in return for a long term guarantee. Some lenders seem to think not. A lot are still deciding to foreclose than accept the lower principal.
This reason can probably be blamed on the way accounting works, since foreclosed homes still show on the banks accounts as assets, while a write down of a loan lowers income immediately. Most bankers don’t purposely want to lower the value of the balance sheet of their bank.
Many homeowners can certainly benefit from such a program, especially if the market value of their house has not gone down too much. If a homeowner still has some equity in the home, the bank will not be taking as great a risk, and will probably be willing to renegotiate better terms for the homeowner.
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