Hope for Homeowners–and a Great Big Trap
By Däna Wilkinson, Attorney at Law on Aug 12, 2008 in Foreclosure News
By now, most people know that Congress and our President managed to pass and sign into law the so-called “Hope for Homeowners Act,” which is essentially a loan guarantee program that is intended to persuade lenders to refinance at least a tithe of the troubled loans out there.
In addition to the qualifications for that program, some observers have noted the purely voluntary nature of the program, and are pessimistic about it achieving its stated goal.
However, there is one potential pitfall that should be highlighted, heavily underlined, and flagged with red. In order to get the newly guaranteed loans, your existing lender has to be willing to write down the loan to 90% of the home’s value, as established by a current market appraisal. Once that new loan is in place, when you sell your home, or refinance it again, you must share any appreciation (read “profit”) with the government.
At first, that share is computed on a sliding scale. If you sell in the first 12 months after refinancing, the government gets 100% of the profit. If you sell after one year, but before the two-year anniversary, the government gets 90% and you get 10%, until after the five-year anniversary of the loan, you split any profit with the government 50/50.
But here’s the rub–it doesn’t change after that. So, if you continue to pay for 15 years, for example, and you go to sell your home after all that time, 50% of the profit, based on that appraisal you got in connection with the Hope for Homeowners Act, will go to the government.
I read two different summaries of the act which left me with the impression that the percentage shared with the government would continue to go down. It wasn’t until I read the actual legislation that this potential pitfall became clear. (H/T to M.S.)
Say, for example, that you have a house that appraises now for $100,000, and you refinance through the Hope for Homeowners program for $90,000. Now, look into the future. You faithfully make your payments for 24 years or so, and your mortgage has been paid down to $35,000. To keep the math easy, let’s say the house is now worth $250,000, but your kids have left the nest and you want to downsize. You sell the house, and what happens? Yep, the government gets $75,000 (50% of the appreciation from $100,000 to $250,000).
So, what should you do? If the initial write-down of the mortgage debt is significant enough, it may be worthwhile to take advantage of the program, even if you have to split your future profits. For example, let’s say you have a $130,000 mortgage now, and your house appraises at $100,000. You refinance at $90,000. Over the next five years, your property appreciates to $120,000. Without refinancing, you’d still be underwater at this point, so splitting the $20,000 profit with the government still puts you ahead.
On the other hand, start out with that same $130,000 mortgage, but the initial appraisal on the property is $125,000. You refinance at $112,500, and have the same 20% appreciation over five years. In that scenario, the government’s take of your profit is $12,500, but you only saved $5000 on the write down. Obviously, there are some other factors that play into this analysis, such as whether you would lose the home to foreclosure without the writedown/refi, but sharing potential profit is a big deal and should be carefully considered.
I also think it would be wise for virtually anyone who takes advantage of this new program to work toward re-financing or selling at or about the five-year mark, but that too will be influenced by the market. If you find yourself in a swiftly rising market, you may be better off to pay a larger percentage sooner, and keep a greater benefit for yourself down the road. Any homeowner considering this loan program should monitor changes in market value and plan ahead, to maximize profit and minimize the long-term cost of the program.
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