Headlines have recently concentrated on the $700billion bailout bill, but how many homeowners are aware that a bill passed last year to help them became effective on October 1, 2008? “Hope for Homeowners” was designed to help some qualifying homeowners to negotiate refinancing out of a variable rate and into a fixed rate loans, with lower monthly payments.

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 is up to the lender to determine whether the borrower can be moved into a different loan structure. It would seem sensible that they would decide to participate if the alternative would be to put the home into foreclosure. Logically, it would seem better to lose some interest than the whole loan principal.

The program works as follows: Many borrowers used ARMs in order to take advantage of temporary advantageous interest rates. But if the rate increased, the homeowner would want to see about renegotiating the loan. At the same time, the value of the home was probably falling, leaving a lower equity in the home to be able to obtain a new loan.

An example would be the case of a borrower who obtained a loan for $250,000 and his balance on it was $215,000 at the time the rate was going to be reset, but with falling home values, his home is now worth $190,000. This kind of reverse equity in the loan gives the borrower no option but to reset, at whatever rate.

The Hope for Homeowners bill will guarantee the repayment of the mortgage to the bank. The kick in the program is that the new loan not be for greater than 90% of the assessed value. So now the lender has to decide to take the guarantee for only $171,000, in the example we use, and therefore a loss of $30,000. The bank, though, would be guaranteed that the $171,000 would be paid. The decision the bank has to make is whether it is better to accept the loss and have a long term guarantee. Each bank has differing views on this. Many still appear to prefer foreclosure rather than to take the current loss.

This may seem odd, but accounting may be the reason for it, since a property, even if it is in foreclosure, still shows as a balance on the books of the bank, but a loss would have be reflected immediately. Short term thinking lenders would rather not have these losses while they are in office.

There are those, however, for whom the program may work, if there has not been a big reduction in the value of their homes. In the case where the home has a good market value relative to the outstanding debt, the bank will not have to accept as great a loss, or perhaps none at all.

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