“Hope for Homeowners” – How to Avoid Foreclosure

• In 3Q08, 766,000 foreclosure filings were processed in the U.S.
• Since August 07, 851,000 homeowners have defaulted on their mortgage loans
• In September 08, 81,000 homes were foreclosed upon, a 12% decrease from August
• The foreclosure rates and cycle are the worst in U.S. history. Steps have been taken and laws created to help stem the tide of foreclosure filings. But, are they working?

What States Have Done to Help Stem the Foreclosure Rate

Although the number of foreclosures recorded in September, 08 are substantial and mind boggling, they are still well below the number of foreclosures recorded in August. Part of the reason for the dip is due to new state laws enacted that give homeowners more time to avoid default and to bring their mortgages current.

California, a state with one of the highest national foreclosure rates, requires banks to contact homeowners behind in mortgage payments at least 30 days prior to delivering a Notice of Default. As a result, California defaults decreased 51% September over August. A Notice of Default is a document that the lender files in the county recorder’s office when a borrower is at least 60 days behind on their mortgage payments. It just states simply that the borrower has become delinquent on the mortgage loan. After the Notice is filed, a borrower has 90 days to bring their account current and reinstate the loan.

North Carolina passed a law similar to California’s and defaults decreased there as well by 66%.

The proof that the law works to benefit homeowners would really come after the 30 day period has expired and the news is not that good. What the law has done is to allow homeowners a “free” 30 days in their home before the inevitable default notice arrives.

In Massachusetts, a law was passed in May, 08 forcing lenders to give defaulting homeowners 90 days to bring their mortgage payments current before issuing the Notice of Default. that, in effect, would give the homeowner 180 days – a full half year – to save the home. In September, 90 days after the law was first executed in June, foreclosure filings (NOtive of Default) skyrocketed by 465% September over August.

Is “Hope for Homeowners” Preventing Foreclosures?

To help stabilize the housing market and the economy, a rescue bill called “Hope for Homeowners” was signed in July and enacted on October 1st. “Hope for Homeowners” allocates $300 billion to homeowners which allows them to refinance their mortgages into FHA-backed loans. The Congressional Budget Office (CBO) thinks that the bill could help over 400,000 homeowners which is substantial given that Nevada, the state with the highest foreclosure rate, sees 1 out of 82 homes go into foreclosure while Florida is 2nd at 1 in 178 and California comes in 3rd at 1 in 189. The question, though, is how substantial?

Is “Hope for “Homeowners” working? Not as effectively as was envisioned. One reason is that it is voluntary for lenders to participate and alot of lenders refuse because they would have to write down the existing loan of a homeowner at risk of foreclosure to 90% of the current market value of the home. So, if a lender holds a $1,000,000 mortgage, a mortgage value common in California, and the home is appraised at $800,000 then the lender would have to lend at $720,000 – $280,000 less than the original mortgage note and 90% of $800,000. On the flip side, though, shouldn’t banks look to make these loans given the $600 billion government bailout to the banking industry? How exactly are banks using this money?

The second reason that “Hope for “Homeowners” is not working as effectively for homeowners in risk of foreclosure is that many lenders do not understand the guidelines which were issued on October 1st – it’s only been a month, they say. Nor are lenders prepared to handle the onslaught of demand. Millions will apply.

The third reason is that alot of homeowners do not qualify. To qualify for “Hope for Homeowners”, borrowers must show that they are at risk of foreclosure, that their home is their primary residence and that their mortgage payment is over 31% of their gross monthly income (as of March, 08).

It normally takes 45-60 days to secure a FHA loan so we won’t know if “Hope for “Homeowners” has worked until December but it doesn’t take a rocket scientist to figure out that some borrowers will be saved from foreclosure while a larger percentage sinks deeper into indebtedness and the economy, as a whole, remains in recession.