Even though all of the news has recently been about the big federal bailout of the financial industry, do homeowners know that there was a rescue plan passed to help them? This new program, called “Hope for Homeowners” is intended to help homeowners threatened with very high reset rates on their variable rate mortgages.

Since many mortgages were granted with teaser rates that made the monthly payment affordable, when the rates reset to normal or even higher than normal rates, some people will not be able to afford their monthly payments.

Of course, the bank has to agree to this lower rate, it is not up to the homeowner to decide if he can be part of the program. It would seem logical that they would decide to participate if the alternative would be to put the home into foreclosure. This would seem to make sense since the lender would only lose a portion of the loan.

Here is the way the program is organized: There are many borrowers who obtained ARMs that, at low rates, were affordable. But if the rate increased, the buyer would want to look into renegotiating the loan. Now, with housing prices coming down, many times there is no possibility to pay off the loan because there is no equity in the home.

Let’s say a borrower took out a mortgage for $250,000 and still had a loan balance of $215,000 when the ARM reset; his property, however, is now only worth $190,000. This kind of negative equity in the loan gives the homeowner no option but to reset, at whatever rate.

Programs built to help homeowners now give the lender a guarantee on the new home loan. The guarantee is not allowed to be for greater than 90% of the house’s 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 have a guarantee that the $171,000 would be paid. This is the choice that they have to make: an immediate small loss or a longer term risk of total loss. Each bank has differing views on this. A lot are still choosing to foreclose than accept the lower principal.

This reasoning can probably be blamed on the way accounting works, since foreclosed properties still show on the banks accounts as assets, while a write down of a loan lowers income immediately. Short term thinking lenders would rather not have these losses while they are in charge.

Many homeowners can really benefit from such a program, especially if the assessed value of their home has not decreased too much. It is a matter of the loss the bank is willing to accept, so 90% of a higher value will be an incentive to the bank.

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