Does the US Government Really Want to Help You Stop Your Foreclosure

On July 26th 2008 Congress signed a bill to help homeowners facing foreclosure to save their homes. The 300 billion dollar foreclosure rescue bill is aimed at helping homeowners to avoid foreclosure and rescuing the mortgage giants Fannie Mae and Freddie Mac. The criterion for qualifying is listed below.

The homeowners must currently live in the homes. The mortgage was issued between June 2005 and January 2007. The homeowner must be spending at least 31% of their gross monthly income on mortgage payments. The homeowners facing foreclosure can even be current on their mortgage payments, but show they cannot continue making payments. This is a departure from current practice of waiting till you start getting behind on your mortgage p[payments and begging for some relief to save your home from foreclosing.

The homeowner must retire any other debt they have on the home such as home equity loan. The homeowner cannot take out another home equity loan for another 5 years on the property. As simple as this sounds, the original lender has to agree to taking a loss on the current mortgage. With all the banks in trouble on the mortgages they handed out with little to no oversight, the mortgage companies might gladly give up these subprime loans to clear up the mortgage companies negative credits. Mortgage companies on average lose $50,000 per foreclosed home, so they might be willing to take a smaller dent on their loan then to risk foreclosure.

The new loan will be secured by the government backed FHA (which offer the homeowner more protections then the conventional mortgage)Of course there are strings attached to the new FHA backed loan. Homeowners will need approval of FHA and the total debt cannot exceed 95% of the homes appraised value. I assuming what they mean by appraised value is for current market conditions and not what the homeowner bought the house for.

The FHA requires an annual insurance premium of 1.5% of the mortgage for the FHA to guarantee the loan. For a $200,000 home that would amount to $250 a month insurance premium. That is a pretty hefty insurance premium to pay each month. The FHA is requiring a 3% "Exit Fee" on sale of the property (on our $200,000 home that would be $6000) plus a share of the profits on the sale of the house. If the property is sold in the first year, the FHA keeps 100% of the profit. So if our $200,000 dollar home sold for $220,000 FHA would keep the $20,000. This profit sharing drops 10% a year till year five then after that the FHA keeps 50% of the profits.

So if we look at the numbers and look at owning a home for ten years. The market value increases 5 % in your area the value of your $200,000 home would be $325.775. Your profit in those ten years would be $125.779. The FHA would keep 50% $62,887.50 plus the 3% exit fee of 9773.25 if they take the value from when you sold the house. This means the FHA will take $72,660.25 leaving you with $53114.75. Let's not forget those FHA insurance premiums you paid for ten years. That was 1.5% a year times ten years on our $200,000 home equals $3000.00 a year times ten for a total of $30,000.00. WOW, that drops our profit to 23,114.75 for the home. So to the home owner makes about 1% a year and the FHA takes the rest of the equity. If you need to move into a larger home that is valued at a higher price you're not going to have much money to put down on the new home and there is no incentive to pay down the FHA mortgage loan.

Is it worth it? If you're a homeowner facing a foreclosure with no other options, YES. This could be a life saver. For most homeowners who figure their homes are part of their financial worth, try to find other ways to save your home first with other options. The Homeowner Rescue bill takes effect October 1st 2008 and many homeowners need help now to save their homes.