Hr Act 3221: The Housing & Economic Recovery Act Of 2008 (hope Fund)

In late July of 2008, President George W. Bush signed into law the Foreclosure Prevention Act of 2008. The primary purpose of the Act is intended to save approximately 400,000 homeowners from foreclosure by offering government-backed loans. Fannie Mae or Freddie Mac will insure up to $300 Billion in loans for lenders who choose to participate in the program, which is voluntary.

The following example demonstrates the principle of the Act to assist homeowners: Homeowner A owes Lender B $120,000 on his house, although the market value of his house is only $100,000. The new Act allows Lender B to consent to a loan modification where the government will insure 90% of the market value of the home (in this case, $90,000), but only if the lender agrees to charge-off the other $30,000 on the loan.

Pros for the Homeowner: The loan modification must result in a 30-year, fixed rate mortgage which, in addition to a reduced principal loan amount, will significantly lower payments.

Pros for the Lender: The loan is now insured for 90% of the home’s market value, so if the home does go into foreclosure, the lender will get all 90% of the market value back, where before, the lender would recover about 30-70% of market value.

Cons for the Homeowner: The homeowner cannot refinance or take out a second mortgage within 5 years of the loan modification. When the home is sold, the homeowner must split the proceeds (profit) of sale with the lender, even if the mortgage has been fully paid off and satisfied.

Cons for the Lender: The lender usually will have to charge-off a large portion of the loan in order to participate in this program, and trade-in a usually profitable interest-only and/or variable rate loan for a less profitable fixed rate. Many homeowners participating in the program may have little or no money left from the proceeds of a house sale because they have too many liens on the property .

Pros for your Association: Remodification of high-risk loans will make it more likely that your members will be able to pay their Association fees on a timely basis, which prevents loss of revenue and limits the costs of collection. This may also be an alternative to some homeowners instead of filing for bankruptcy, where the Association usually loses a portion of Association fees. The program will also eliminate seller-assisted down payments, so the Association is more likely to have a paying member because the homeowners will have bigger stakes in the properties.

Like any other government-sponsored program, there are other stipulations which may prevent some homeowners from participating. The program will only help approximately 400,000 borrowers, but there are currently 2.8 million people in the United States either facing foreclosure or in foreclosure. In addition, the program only covers the primary residence of the borrower, so no help for your Florida winter home or investment property. Only certain areas of “Economic Distress” will qualify for the modification, and on top of that, the lender participation is voluntary. Provisions of the new bill also specify a $7,500 tax credit for first-time homebuyers (a non-interest bearing loan payable back to the government in 10 years), and pre-foreclosure counseling.

The Act takes effect on October 1, 2008.

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