HOPE for Homeowners

Last week I opined that the $700 Billion Bailout will entice fraud.  Equally troubling is the bills encouragement for the expansion of another bill passed earlier this year called the HOPE for Homeowners Act of 2008.

The centerpiece of HOPE is a $300-billion FHA loan guarantee (not money) to refinance under-water home “owners.”  Consider a homeowner who bought a $200,000 home three years ago, made a 5% down payment and got a 5-year interest-only ARM for $190,000.  The home has fallen 25% in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset. 

Her rate is not bad, 5.50% even after adjustment.  However, her payment will jump from $871 to a killing $1,167.  To her rescue, the bill’s “HOPE for Homeowners.”

Money Down the Drain

HOPE provides for a write-down of the mortgage to 90% of current market value, to $135,000, plus a 3% refinance fee to the FHA, $139,000 total.  Further, HOPE provides a 1.5% annual surcharge; added to 6.50% current market equals 8%, amortized for 30 years is $1,020 per month.  Better by a bit and possibly affordable.  HOPE has an anti-equity kicker: when the place appreciates in value (how many years ahead?), and she either refinances off the 8% or sells, HOPE will take half of any appreciation.  Some people are complaining that HOPE won’t split costs. 

While the homeowner considers HOPE humiliation, a new renter moves into the house next door, identical, and pays rent $700. Millions of people just like her are now condemned as “Walkaways.” 

Real estate agents are complaining about this bill, saying that it isn’t fair to the homeowner who walked away by taking half the profits and that HOPE likely won’t split half the costs so why should they get half the equity.  I disagree.  Forget the renter next door, forget the homeowner who got a freebie, what about the honest guy across the street who made a down-payment of 80% and is now stuck with a home whose price is continually pummeled by the bad neighbors.

One good feature of the bill is that the bank holding the mortgage must voluntarily write-down the loss of $55,000 loss.  If they refuse, no deal and foreclosure ensues.  The summary optimistically predicts over 400,000 homeowners will take advantage of the bill.  But the mortgage is a “distressed asset” and subject to the $700 billion TARP program.  While I don’t think many banks will participate, when the government buys the troubled asset it will easily allow the re-finance under HOPE.  

Irresponsible people, from home buyers to bankers to real estate agents, are the ones making out on this deal.  For the honest, hard-working stiff who lived within his means, he gets stiffed!  And it’s just more government (the people’s) money down the drain.

These are very troubling times indeed.