It seems the government is bailing everyone 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.
Too many homeowners are not able to pay their mortgage payments, even if they could initially afford them, once the ARM (Adjustable Rate Mortgage) reset to a new, higher rate.
Of course, the bank has to agree to this lower rate, it is not up to the buyer to decide if he can be part of the program. They may be willing to do so if the only other solution to renegotiating is to let the house go into foreclosure. This would seem to make sense since the lender would only lose a part of the loan.
The program functions in the following manner: Borrowers got their mortgages at low adjustable rates, and this made their monthly rate affordable. But if the rate increased, the buyer would want to look into renegotiating the mortgage. At the same time, the value of the house was probably falling, leaving a lower equity in the home to be able to obtain a new loan.
An example would be if a borrower who took out a loan for $250,000 and his balance on it was $215,000 when the rate was going to be reset, but with falling home values, his home is only worth $190,000. This is called negative equity, and it pushes the homeowner to reset his existing mortgage, regardless of how disadvantageous the rate is.
Hope for Homeowners will guarantee the repayment of the new loan to the bank, with one big caveat. The problem is that the loan guarantee is for only 90% of the value of the home. In the borrower’s case, shown above, the lender would have to accept a guarantee of only $171,000, a loss of more than $30,000 on the mortgage. The offset argument is that at least the bank knows it will get this $171,000 rather than take a chance on losing the whole $215,000. This is the choice that they have to make: an immediate small loss or a longer term risk of total default. Some lenders apparently think not. Many lenders do not appear to be willing to take this immediate loss.
This reason can probably be blamed on the way accounting works, since foreclosed homes still show on the banks accounts as assets, while a write down of a loan lowers income immediately. Sad to say, lenders can be short term thinkers and would rather put off the pain instead of showing a loss on the balance sheet.
But that should not stop any homeowner from making the inquiry and taking a chance on renegotiating better terms on a smaller mortgage. It is likely that homeowners who do have some equity in their houses will have a better chance of getting a renegotiation, since there will not be such an extensive loss for the bank.
Variable or fixed mortgages here: alberta mortgage rate or edmonton mortgage brokers
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