The Lifeboat Of Foreclosure Rescues

July 18th, 2008

The lifeboat of foreclosure rescues bobbing through the choppy waters of the Congress will allow many borrowers who would otherwise have to surface and reach the shore. This they will be able to do with government insured mortgages backed by the insurance coverage of Federal Housing Administration. These new loans will be with lesser interest rates and more time coverage.

The new rescue package will help them stay in the houses that are their homes if they fulfill certain conditions like proving that they can pull along with the new mortgage payment schedules.

The plan provides considerable benefits for the lenders by allowing them an alternative to costly and lengthy foreclosures. In return they will have to sacrifice part of the principal amount. If the new arrangement turns sour the lenders can be assured of government guarantee regarding paying off dues. Thus the lenders are being offered enough incentives to agree to the lifeboat rescue foreclosure package.

With the help of two examples one can get a clear picture of the pros and cons of the issue at stake.

In the first example a house is bought for $200,000 in 2005. Today it is valued at $150,000. But the loan is $200,000. According to the FHA plan the borrower proves that he can afford to take a new loan – it being 90% of the value of the house, that is $135,000. The lender now agrees to lower the main amount by 15% of the freshly assessed value – calculating to $127,500. Thus the lender agrees to 36% loss. The previous high monthly rate of $1,470 calculated at 8% now drops to $875 – that is 6.75% fixed rate.

In the event of a foreclosure the borrower loses the house. The lender repossesses the house after spending $110,000 towards foreclosure expenses. This means a loss of 45%.

In the second example the house is bought for $150,000 in 2006. It is currently valued at $120,000. The loan amount is $150,000. According to the FHA plan the borrower proves that a loan of 75% of the value of the house is affordable. The lender lowers the principal loan by 30% of the current value that calculates to $84,000. The lender thus accepts 44% loss. For the borrower the monthly payment goes down from $1,200 (8.9%) to $600 (7% fixed rate).

In case of a foreclosure the borrower loses the house while the lender after meeting foreclosure expenses is left with $87,000 that calculates to a loss of 41%.