Foreclosure Hope in Sight

There may be HOPE for some troubled homeowners out there, I’m learning the newly proposed housing rescue bill is aimed at helping homeowners avoid foreclosure and at the same time supporting Fannie Mae and Freddie Mac.

If the bill is signed it will come into effect Oct 1st 2008. At risk borrowers will be able to refinance their unaffordable mortgages into new low cost fixed rate loans insured by FHA. This bill may be able to help as many as 1-2 million borrowers.

So here’s what you need to know if you’re looking for some help:

Qualified borrowers must be owner occupants and have loans that were issued between Jan 2005 – June 2007. They must also be spending at least 31% of thier gross monthly income on mortgage debt to be eligible.

Borrowers must be able to prove that they will not be able to pay their exisiting mortgage, and can be either in default or up to date on their loan -  they will also need to be able to prove they are not deliberately defaulting just to obtain a lower payment.

Each loan will have to be underwritten by an FHA lender , this means the banks will do a new appraisel to determine the homes current value. Total debt should not exceed 95% of the homes new appraised value, based on this, the FHA lender has to reduce the original mortgage, so that it will reflect 90% of the home’s market value.

Lenders holding the original loan have to agree to rework the loan before the process can begin. They will only sign off on a workout if they think that it will be more beneficial by doing this than they would by allowing the foreclosure process.

Part of the deal also is – the previous lender will write off any fees or penalties on the original mortgage, including prepayment penalties and accept the proceeds from the new loan on a paid in full basis.

Of course with any thing like this there are always other strings attached:

Borrowers will be responsible for paying a mortgage Ins premium which will be 1.5% of the principal annually. They will also agree to share any profits from home price appreciation with the FHA.

If they resell or refinance they will pay a 3% exit fee to FHA. If they resell or refinance within a year they will pay FHA 100% of the profits from the increased value. After one year, borrowers will share 90% of the profits with the FHA, the percentage keeps dropping in 1% increments to 50% after the 5th year where it will stay.

We do need to look at the positive side of this, in some situations the saving will be substantial, in some areas where prices have dropped by 30% or more the loans could be reduced by more than 40%. Whether this will happen, well time will tell. We might not see the profit some have reaped the benfit of over the past years in skyrocketing real estate, as FHA will be sharing this – but overall it will give us the security and peace of mind that we can stay in the home we love, freeing us from the stress, worry and emotional burdens so many have been carrying on their shoulders recently.

I think we’ve been led to believe in the past  there is more help available out there than there actually is from the lenders. So far from what I have been told there has been little help with negotiations on troubled loans – we keep hearing through the media the lenders will consider this, but the news in general is that its not really happening.

So perhaps this new bill will at the very least give us some HOPE.

CNN Money contributed to this article.