Hope for Homeowners

If that title sounds positive that's because it is a political slogan-type name for a program that was launched by FHA on October 1st. The reality is that it doesn't seem to have found any traction in the marketplace. Only about 100 homeowners have applied according to reports that were widely circulated.

The original program required the cooperation of the existing lender. Cooperation means that the lender had to be willing to take a "haircut" and write off the balance from whatever it was down to 90% of the home’s current value.  The newly adopted standards would change that to 96.5%. Theoretically that slight change would make it more attractive to lenders.

But there are drawbacks for borrowers also. For example, the homeowner would have to give up to the government half the appreciation upon sale or subsequent refinance of the property. It's expensive too. The upfront payment for mortgage insurance is 3% of the loan amount, $9,000 on a $300,000 loan. In addition, annual mortgage insurance is 1.5% or $4,500 per year on that same mortgage.

You would have to wonder how someone who could not afford to make his current payment could afford those additional fees on top of the regular monthly payment. If the interest rate were 6%, the total with mortgage insurance would be equivalent to 8.5%. That's hardly attractive except for a homeowner whose home had really dropped in value, like 50%. Then you'd wonder how enthusiastic the lender would be.

In addition, there are many additional requirements that are outlined in the announcement which you can find here.

Another government program, FHASecure, was designed to help refinance subprime borrowers out of their toxic loans. Announces in August 2007 the FHA website announced:

"An estimated 240,000 families can avoid foreclosure by refinancing their mortgages using the new FHASecure plan."  

In February, an optimistic statement HUD press release said,

"FHASecure has helped more than 100,000 families stay in their homes."

However, in a story reported by the AP on November 19th, HUD Secretary Steve Preston acknowledged that only some 4,000 delinquent borrowers have been helped.  That's a long way from 240,000.

Bottom line, I remember someone saying to beware when someone comes up to you and says, "I’m from the government and I’m here to help you."