Hope Floats Till the Government Gets Involved

Hope Floats Till the Government Gets Involved

By Jason, Feb 01 in Blog, Mortgage News with 1 comment

Residents of the Golden Triangle (Mt Dora, Eustis, and Tavares) of Florida will be losing more than “Hope” if they choose to act on the government’s newest mortgage bailout program that HUD introduced through FHA last year. The “Hope for Homeowners” (H4H) was designed to help homeowners keep their homes by renegotiating a lower mortgage payment through this unique refinancing program.

FHA (Free?! Ha, Assumetheposition) will refinance your home based on the current appraised value. They will only lend up to 96.5% of the appraised value. Yes, the lender will assume a loss on the difference between the current, existing mortgage and the new one. (Note: I said assume.) With the new, lower mortgage principal balance, a homeowner will have lower monthly payments that they should now be able to afford.

As with anything, there is a catch. First, you have to qualify for the H4H mortgage program. But I am not going to cover the qualifications. The second catch is the lender’s assumed loss. (You honestly did not think the bank was just going to walk away from all that money they were supposed to make off of you and let you get away with it… did you?)

Here is where the bank makes up for its assumed loss. The philosophy behind this program is called “shared equity.” Put quite simply, any equity that you make through appreciation from the time of the refinance to the time of sale is split between you and the bank. And if you are thanking that share means 50/50, you are sadly mistaken. Here is a link to HUD/FHA talking about the H4H program. Notice that it quickly talks about the “shared equity,” but never mentions the splits. Probably because if it did, no one would really do it.

Here are the splits:

  • 1st Year – Bank gets 100% of the equity (Yep, they are getting 3.5% equity right off the bat because they only lent to you 96.5% of the appraised value.)
  • 2nd Year – Bank get 90%
  • 3rd Year – 80%
  • 4th Year – 70%
  • 5th Year – 60%
  • After 5th Year – 50%

Now you can see that the bank is not going to really loose any money.  Oh, one more thing… the bank is going to make you pay almost 3 points (3%) of the loan amount to take out mortgage insurance.  That is insurance that the bank will receive in case you default on your mortgage… AGAIN.  Who is really losing out on this deal?  Sure the homeowner gets to keep their house, but at what cost… losing equity?

I would rather give up my house through a short sale or walk away and let it go to the bank.  Then I would rent for a year or two, so I can save up some money and re-build my shot credit.  After 1-2 years, I would go house hunting again, use the money I saved up, and buy a new home.  Or I would go USDA (100% financing), and save my money for a rainy day.  In this case, I get to keep 100% of my equity from that point forward.  With H4H, I am only getting 10-20% of the equity from my home with a maximum of 50% should I choose to stay there for over 5 years.

Moral of the story: sometimes we have to do the opposite of what we are taught to do or want to do, so we can better ourselves in the future.

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