The Government Wants You to Buy a New House
by Jaimie M. Bergman
It seems the government is bailing the whole world out, and today, the person with a mortgage is not left out. This new program, named “Hope for Homeowners” is intended to help homeowners threatened with very high reset rates on their variable rate mortgages.
In many cases, homeowners with adjustable rate mortgages see their rates reset and the new rate makes their mortgage unaffordable.
Of course, the bank has to agree to the lower rate, it is not up to the homeowner to decide if he can be involved in the program. They may be willing to do so if the alternative to renegotiating is to let the house foreclose. Better to lose some interest income than the entire principle.
Here is how the program is supposed to work. In the past, borrowers would use ARMs to take advantage of temporary dips in the interest rate. Once rates increased, a borrower would try to renegotiate at the best rate. But with falling housing values, there is often not sufficient equity in a home to be able to refinance the maturing loan.
An example would be if a borrower who took out 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 only worth $190,000. This is called reverse equity, and it forces the homeowner to reset his existing mortgage, regardless of how disadvantageous the rate is.
The new program guarantees to the lender that the new, refinanced mortgage, will be guaranteed. The kick in the deal is that the new mortgage not be for more than 90% of the market value alberta mortgage brokers. This means, in our above case, that the homeowner could only borrow $171,000, and the bank would have to take a loss of over $30,000. The bank knows he will receive $171,000 in case of default, however. This is the choice that they have to make: an immediate smaller loss or a longer term risk of total loss. Some lenders would rather not calgary mortgage rate. A lot are still deciding to foreclose than accept the lower principal.
Accounting rules may be responsible for this reluctance, since foreclosed homes remain on the lender’s books as an asset, while a write down like this is an immediate loss. Short term thinking bankers would rather not have these losses while they are in office.
The program may be perfect, however, for owners who have not had a big adjustment in the market value of their home. It is likely that homeowners who do have some equity in their houses will have a better chance of obtaining a renegotiation, since there will not be such an extensive loss for the bank.
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