October 31st, 2008 2:49 PM

Solution to believe in

The FHA's new refinancing assistance program, Hope for Homeowners, went live on October 1, 2008. It gives homeowners the opportunity to obtain 10 percent equity in their homes, plus lower loan payments, but they must agree to pay mortgage insurance premiums, share in the equity gains created by the refinance, and give up a share of the home's future equity appreciation. The program is managed by the U.S. Department of Housing and Urban Development (HUD) and the FHA.  

Officials at Bank of America/Countrywide have hinted that they may proactively review their mortgages and contact qualified borrowers to participate in Hope.  Distressed homeowners, however, shouldn't wait for the lender to propose a solution. A better strategy is to proactively call the lender, mortgage servicer, or a qualified mortgage counselor right away; any of these parties can recommend a borrower for the program. Those who wish to speak to a counselor should contact the Hope Now Alliance at 888-995-HOPE.

Hope springs eternal

Hope for Homeowners can avert foreclosure, but there are costs and risks involved. Since the new mortgage balance cannot exceed 90 percent of the home's current value, lenders must voluntarily write-off a portion of the debt. Some lenders may not be willing to comply. Writing off principal ensures a loss for the investors backing the mortgage, so it's typically considered a last-resort option.

Homeowners end up paying for the debt write-off with equity sharing and shared appreciation arrangements. If the homeowner sells the property within one year of the refinance, the full value of the written-off amount must be paid back to the FHA. That percentage is gradually reduced in time to a floor of 50 percent if the home is sold after five years. On top of that, the homeowner must also split any increase in the property's value with the FHA. In other words, if the home is sold for $50,000 more than what is was worth when the refinance was done, the FHA gets $25,000, plus the appropriate percentage of the written-off amount.

Homeowners also have to pay upfront and ongoing mortgage insurance premiums to the FHA. The upfront amount is 3 percent of the mortgage balance; the ongoing portion is 1.5 percent of the mortgage per year, split up among the 12 monthly payments.

The program is only available to owners who live in the mortgaged home and can't afford their current mortgage. Credit requirements apply, including a maximum mortgage debt-to-income ratio of 31 percent.

Lawmakers believe that Hope is a workable solution to a complex problem. If lenders support the initiative, homeowners really will have something to believe in.

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