Mortgage Q&A: Homeowner bailout bill questioned

I have to chime in on the recent Hope for Homeowners legislation. The recently passed bill calls for $300 billion in funds to bail out a predicted 400,000 homeowners on the edge of losing their homes to foreclosure. Here’s a quick and dirty summary of the legislation.

OK folks, I don’t think this thing is going to work. There are just too many details that, I believe, won’t be worked out to close 400,000 loans. Let’s do a little dissecting.

First, FHA must persuade the existing len ders to take substantial losses. In theory, this makes plenty of sense. A lender may have an outstanding loan in the amount of $200,000 secured against a property that once was valued at $206,000. The property value subsequently drops to $190,000, and the borrower is defaulting on the mortgage. Instead of going through the time and cost of foreclosing on a property worth significantly less than the mortgage balance, the lender agrees to take a big loss to get out of the deal.

Under the Hope for Homeowners program, the borrower would refinance to a new loan equal to 90 percent of the home’s existing value. In this case, the new loan amount would be $171,000. FHA would then back out the 3 percent insurance fee of $5,130 and the existing lender would receive $165,870 of its original $200,000 loan balance.

Will the lender agree to these terms? Perhaps. As I said, it may be better than going through foreclosure proceedings and inheriting a house worth $190,000, but this is the first unknown question. The program is entirely voluntary. The FHA and existing lenders may not agree on everything. Determining the existing value of the home may be the first point of contention.

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