Mortgage rescue plan will save your house but will cost you equity

By Michelle Singletary
October 19, 2008
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For homeowners trying to renegotiate their loans under the government's new HOPE for Homeowners program, also known as H4H, please read the paperwork carefully - because once again you'll be stuck with a costly mortgage deal.

Lenders who voluntarily allow borrowers to refinance under H4H are required to reduce the size of the mortgage to a maximum of 90 percent of the home's current appraised value and they can only give people 30-year fixed-rate loans.

As many as 400,000 homeowners could avoid foreclosure through the program over the next three years.

This program provides a last hope for homeowners by bringing in the federal government as their investment partner for as long as they own their homes.

But it is an expensive rescue.

If you take this deal, you have to split the initial equity created by the write-down of the mortgage with FHA. The government also gets a 50 percent cut of any appreciated value for as long as you own the home - even after you pay off the mortgage.

For example, let's say your home has an appraised value of $200,000. The lender would have to give you a 30-year fixed-rate loan for $180,000, which is 90 percent of the current appraised value.

So at the start of the loan, you have $20,000 in equity. If you sell the home in the first year after receiving the loan or you refinance, FHA gets 100 percent of that $20,000. If you sell after two years, FHA would get 90 percent of the equity, or $18,000. Each year up to year five, the share that FHA gets is decreased by 10 percent. After year five, you have to share 50 percent of the equity created with the new loan.

If your home goes up in value between the time you receive your H4H mortgage and the time you sell the property, you will share the amount of this increase with FHA minus any closing costs and a portion of any improvements you have made.

So, staying with the previous example, if you sell your home for $250,000 in a few years, FHA would collect $25,000.

There are other rules. H4H participants are barred from taking out second mortgages except to maintain the property. Other costs include a 3 percent upfront mortgage insurance premium and a 1.5 percent annual premium based on the mortgage amount.

I have compassion for the many borrowers who were duped by unscrupulous predatory lenders and mortgage brokers. Yes, they should have known better, but somebody got the better of them.

For those homeowners scrambling to save their homes by any means necessary, I won't be so sympathetic years from now if they try to cry foul about having to give up so much of the appreciated value in the home to the federal government.

Michelle Singletary is a columnist for The Washington Post. She can be reached at

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