How Housing Rescue Bill Can Help You?

President George W. Bush has signed into law a bill designed to help struggling US homeowners on July 30, 2008. It is a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac. The Bill is called Hope for Homeowner Rescue Program or H4H.
Thousands of at-risk borrowers will be benefited. They will be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program - but the bill allows for as many as 1 million or 2 million borrowers to participate in the program.

Here are the highlights of the bill about who is eligible:

1. Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007.

2. Borrowers  must be spending at least 40% of their gross monthly income on all household debt to be eligible for the program.

3. Borrowers can be up to date on their existing mortgage or in default, but either way they must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.

4. Borrowers must first retire any other debt on the home, such as a home equity loan or line of credit, before homeowners can get FHA-backed mortgages.

5. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home.

6. In order to get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.

How can  you apply?

You can contact your current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.

How does the refinancing process work?

This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummented by as much as 20%, that will mean a substantial loss for the lender.

For example, if your home was purchased for $400,000 in 2005 and you have a mortgage balance of $390,000. The current fair market value of your home is $320,000, a 20% reduction in property value. Now, the bill requires your lender to make a big concession to write down the value of your new loan to 90% of your home's current value, that is, $320,000. Then the new loan could be $320,000 X 90% = $288,000. This is a huge help to you.

You see, you have a huge reduction in your month mortgage payment. Let's say, your old $390,000 mortgage loan was a 30 years fixed rate one with 6.5% interest rate. Your monthly mortgage payment is $2,465.07.

Let's also assume your new $288,000 mortgage loan is also a 30 year loan with the same 6.5% interest rate. Your new month mortgage payment would be $1,769.79. This is a $695.28 reduction in your monthly mortgage payment! Very good for you!

If you got a adjustable loan and are facing the reset of your payment, or your local real estate market drop more than 20% of the property as I used in this example, you could save even more money.

However, this a big concession from your original lender. Will your current lender will to do it? Since this is a voluntary program, the original lenders may not agree to do so. Lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process.
Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.

Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value.

If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.

As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.

This quite easy to understand that the new lender will be happy to do it because:

1) the new loan amount is only 90% of the  property value (loan to value or LTV); There is a cushion of 10% of the property value for the real estate market to go down, which  could reduce new lender's risk.

2) Even if real estate market continues to go down more than 10%, the new loan is issued by FHA and lender's risk would be at minimum.

What does it cost?

Following are the costs from your side:

1.Loan origination fee;
2.FHA insurance premium;
3.Future profits sharing with FHA.

1. Loan origination fee: You can ask your lender to pay for this by slightly increasing the interest rate to limit your up-front costs. Loan origination fees will vary by lender, but these can usually be paid by you over the life of the loan in the form of a slightly higher interest rate.

2. FHA insurance premium: You are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.

3. Future profits sharing with FHA: You must also agree to share any profits from future home-price appreciation with the FHA. To do that, you'll pay a "3% exit fee" of the mortgage principal to the FHA when you resell or refinance. Plus, you'll agree to pay the FHA 100% of any profits you realize from higher home prices if you sell or refinance within a year. So if the original loan principal is $300,000 and the home sells for $350,000, you will owe the FHA $50,000, minus costs. After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

Click this link to see the Hope for Homeowner Program in PDF file.

Fannie Mae Federal Housing Administration FHA Freddie Mac H4H Homeowner Rescue Program Hope for Homeowner Rescue

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