For example, let's say someone owes $125,000 on a house that has lost value and is now worth $100,000. The owner can't afford the higher payments because of a rate adjustment. The lender would forgive $35,000 of the debt, allowing the owner to refinance with another lender for $90,000. That loan would be insured by the FHA, and would have an upfront FHA insurance premium of about $2,700. In most cases, that $2,700 would come out of the hide of the old lender, on top of the $35,000 in debt forgiveness. Faced with these figures, some lenders might figure that it might be cheaper to foreclose.
Borrowers who take advantage of Hope for Homeowners will have to share their house price appreciation with the government when they refinance the loan or sell the house. Depending on how long they have the loan, they will have to give the government as little as half and as much as all of the gain in the home's value. For example, if the house is appraised for $100,000 when the house is refinanced in 2008, and then the house is sold for $120,000 in 2014, the owner will have to give the government $10,000 -- half of the appreciation.
Second liens and home equity
The biggest stumbling block with Hope for Homeowners is what happens to second liens: home equity loans and lines of credit. In most cases, these lenders -- known as second lienholders -- would get nothing. They would lose the entire amount of the loan. And second lienholders have veto power over refinances under Hope for Homeowners. They have little incentive to agree to refinancings.
In July and August, the Consumer Credit Counseling Service of Greater Atlanta fielded hundreds of calls from homeowners seeking foreclosure prevention advice. In September, CCCS contacted them to find out how many would meet the eligibility requirements for Hope for Homeowners. A little over two-thirds of the 591 respondents indicated that they would be eligible.
What to do next
Troubled borrowers are encouraged to contact either their lenders or counseling agencies. Most borrowers are better off calling counseling agencies first. Counselors can answer basic questions and get borrowers ready to negotiate with the mortgage servicers who can approve workouts.
"It's important to remember that servicers have an extraordinary demand on their personnel," says Suzanne Boas, president of CCCS of Greater Atlanta. "So to the extent that a resource like a credit counseling agency can help answer basic questions, and get people prepared, I think that's very helpful. We have access to dedicated lines and e-mail addresses within the servicing shops where generally we can get a little faster turnaround than the individual consumer calling in."
What to have at your fingertips when you call:
- The date when the loan was originated.
- Know whether there's a home equity loan or line of credit, and the outstanding balance.
- At least one paycheck stub for each earner in the household, to determine gross income.
- A bank statement and copies of all the monthly bills, to determine expenses. This includes credit card, auto and student loan debts, utilities, groceries, and things that are usually paid for in cash, such as lunches.
- The most recent tax return.
New plan for Countrywide borrowers
Hope for Homeowners isn't the only foreclosure prevention game in town. This year, several state attorneys general sued Countrywide, accusing the mortgage giant of marketing adjustable-rate loans deceptively. Bank of America bought Countrywide and settled the lawsuits by promising to modify as many as 400,000 customers' mortgages.
Under the legal settlement, Bank of America will modify the mortgages of borrowers who got subprime loans or payment option ARMs. Some will be ushered into the Hope for Homeowners program and others will get automatic interest rate reductions. Some pay-option borrowers will receive debt forgiveness.
Bank of America is still putting that program together, and will begin reaching out to eligible borrowers in December. Until then, Bank of America won't follow through with foreclosure sales on potentially eligible loans.