There has been a lot of news about bailouts, but they mostly refer to bailouts of big firms, but a bailout of small borrowers has been ignored, but came into effect on October 1, 2008. This new program, named “Hope for Homeowners” is meant to help homeowners threatened with very high reset rates on their variable rate mortgages.

Too many homeowners are unable to keep up with their mortgage payments, even if they could initially afford them, after the ARM (Adjustable Rate Mortgage) reset to a new, higher rate.

The one big issue with the Hope for Homeowners bill is that it leaves it to the lender to determine whether the borrower will be moved into a different loan structure. Banks should have an incentive to offer this program, since so many homeowners are defaulting, it would seem better to have a lower interest rate, then no payment at all. Better to lose a part of the interest income than the whole principle.

The program functions in the following manner: Most borrowers used ARMs in order to take advantage of temporary low interest rates. But if the rate went up, the homeowner would want to look into renegotiating the mortgage. Today, however, more and more houses have no equity with which to pay off the old loan.

If you paid $250,000 for your house five years ago, you probably still owe well over $200,000 on it, but the value of the house is only $190,000 because of falling home prices. This is called reverse equity, and it pushes the homeowner to reset his current mortgage, regardless of how bad the rate is.

The new program guarantees to the bank that the new, refinanced mortgage, will be guaranteed. The kick in the program is that the new mortgage not be for greater than 90% of the assessed value. So now the bank has to decide to take the guarantee for only $171,000, in the example we use, and therefore a loss of $30,000. The lender knows he will receive $171,000 in case of default, however. The decision the bank has to make is whether it is better to accept the loss in return for a long term guarantee. Some lenders would rather not. It seems manychoose not to use the program and continue to risk foreclosures.

This may seem odd, but accounting may be the reason for this, since a property, even if it is in foreclosure, still shows as a balance on the books of the lender, but the loss would have be reflected immediately. No banker wants to be responsible for lowering the asset value of his firm.

But that should not stop any homeowner from enquiring and taking a chance on renegotiating better terms on a smaller mortgage. If a homeowner still has some equity in the home, the bank will not be taking as great a risk, and will probably be willing to renegotiate better terms for the buyer.

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