FHA’s New “Hope for Homeowners” Program

October 14, 2008

By Joel Persinger
YourRealEstateDude.com

With all the news about the recent Wall Street bail-out, you may have forgotten the Federal Housing and Economic Recovery Act that was signed into law by President Bush earlier this year. As a quick reminder, this Act was designed to provide ways for struggling homeowners to stay in their homes and avoid foreclosure. One of the key components, which became available this month, is the FHA Hope for Homeowners program.

Hope for Homeowners is a program designed to provide homeowners a way to: reduce the amount they owe on their homes, refinance their existing loans into FHA-insured mortgages, stay in their homes and avoid foreclosure. For lenders, the hope is that this program will provide another viable option for mortgage lenders wishing to avoid costly foreclosures. But, make no mistake, the lenders will take a hit.

Among other things, the program requires mortgage lenders to write off a portion of what is owed to them. This amount could be significant since the program requires the property to be re-appraised. The original lender is then required to “write down” the current loan to a maximum of 90% of the home’s new appraised value. For example, if a lender is owed $500,000 on a home which has been dropped in value to $400,000, the lender would be required to accept 90% of the $400,000 (or $360,000) as full satisfaction for the debt. That means the lender would have to agree to take a $140,000 loss in this example. This may sound ridiculous, but given the losses lenders are currently taking in foreclosure, participating in this program may make good business sense.

At the end of the day the lender at least receives some payment, foreclosure is avoided and the homeowner gets a new, FHA-insured mortgage for around 90% of the home’s current value. Many homeowners may find that this program will work for them and allow them to stay in their homes while reworking their home loan into a much more manageable payment. However, this program will not work for everyone and it does have other requirements and drawbacks.

Among the things homeowners should know are these: only 30-year fixed rate mortgages are offered, the home loan the borrower wishes to replace must have been originated on or before January 1, 2008, the home must be owner-occupied and the original lender must agree to take the loss. In addition, the homeowner must agree to share any current or future equity in the home with the federal government. That means, when the homeowner sells, Uncle Sam is going to take his cut.

For more information on this program, homeowners can call the Hope Now Alliance at 888-995-HOPE or visit the U.S. Department of Housing and Urban Development website at http://www.hud.gov/.