Portland Metro/Tigard Real Estate News

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Friday, July 25, 2008

Bailing Out Sub-prime Borrowers

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from a rescue bill. This bill is to help homeowners avoid foreclosure by offering at-risk borrowers the chance to refinance their old mortgages into new low-cost fixed-rate loans.

To qualify borrowers must live in their homes and have loans that were accuired between January 2005 and June 2007. Also, they must be spending a minimum 40% of their gross monthly income on all household debt to be eligible for the program. They do not necessarily have to be in default but they do have to prove that they will not be able to continue to make the payments. This is to avoid people defaulting purposely to get a lower payment.

There are more contingencies to this refinance offer. All other home debts like equity loans or lines of credit have to be closed. In fact, they will not be allow another home equity loan for 5 years unless it is an absolutely necessary home improvement.

The original lenders do 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 some hard hit areas that will mean a substantial loss for the lender. So the lender is going to have to believe that they would loose more money if they let it go into forclosure in order to go along with the refinance.

Each of these new loans will be underwritten by an FHA lender so banks will do all new appraisals. The income statements, bank accounts, job hisoties and credit scores will all have to be revisited also.

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.

There will be some fees to consider, including a portion of any profits from future home-price appreciation. They aren't going to just bail everyone out. The FHA will get a 3% exit fee of the mortgage principal when the borrowers resell or refinance. If someone decides to sell or refinance within a year they will be giving 100% of the profits to the FHA. Each year after it will drop 10% till it reaches a minimum of 50%.

Even after all fees considered, it would be a blessing to many people. Not only do they get to stay in their home but they'll finally have a reasonable, fixed interest rate and no forclosure.



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