Government Support for Homes Pending Foreclosure
Bush recently passed a housing law to try and “help” homes that are pending foreclosure. $300 billion is being given to the FHA to help refinance homes at a more affordable rate. This is expected to be dispersed to over 400,000 households. There are many other perks to this housing bill such as grants to fix up foreclosed homes and tax credits for first time home buyers. Read the full article from the News & Observer.
One point that the article does not mention is the fact that the banks still have to WANT to refinance the loan with a FHA loan. According to lenders, the new loan amount would be 90% of the new appraised value and the difference from the previous balance on the home would be a write off. For instance, if the home was worth 500,000 in 2005 and is currently appraised for 350,000 today, the new loan would be $315,000 and the bank would write off $185,000.
My question is, why would a bank want to do that when they can put the home into foreclosure and get 100% of the current value in a shorter amount of time? The new interest rate is not going to be the 3 or 4% that many home owners had in 2002 and 2003 (not to mention those homes that had negative amortization loans). My suspicion is that this might buy time for homeowners but several of them will end up defaulting again. However, this housing bill does do a good job of giving the perception that the government is “there to help”!
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