# New Home Mortgage Bail Out Law **URL:** \ **Category:** Factual Questions\ **Created:** [July 30, 2008, 12:41am UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172 "2008-07-30T00:41:09Z")\ **Posts on this page:** 13\ **Page:** 1
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [July 30, 2008, 12:41am UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/1 "2008-07-30T00:41:09Z")
> **[Housing Bill Has Something for Nearly Everyone (Published 2008)](https://www.nytimes.com/2008/07/25/business/25money.html?_r=2&adxnnl=1&ref=todayspaper&adxnnlx=1217108482-i2%2BK0EiwfKdUzNlPMDgwqA&oref=slogin&oref=slogin)** > > If you think the housing bailout bill will benefit only troubled homeowners, you may miss out on a windfall. Here is one big question I have. Let’s say that you are current on your home mortgage, but you can get a better interest rate and/or better terms by participating in this program. Well, since you are current, your lender probably won’t let you out of your loan. What would stop someone from not paying for a few months right up until foreclosure time so that he/she would qualify for the program? Are there not safeguards built in? ---
**Author:** ![mazinger\_z](https://avatars.discourse-cdn.com/v4/letter/m/5f9b8f/32.png) [@mazinger\_z](https://boards.straightdope.com/u/mazinger_z)\ **Post date:** [July 30, 2008, 2:27pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/2 "2008-07-30T14:27:41Z")
The banks aren’t required to service your loan. If you’re current and better than market, why would you want to refinance? (assuming that you have no emergency expenses). If you decide to turn yourself into a financial basket case, then the lender is just going to foreclose on you and dump your loan. ---
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [July 30, 2008, 3:04pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/3 "2008-07-30T15:04:02Z")
[QUOTE=mazinger\_z] The banks aren’t required to service your loan. If you’re current and better than market, why would you want to refinance? (assuming that you have no emergency expenses). If you decide to turn yourself into a financial basket case, then the lender is just going to foreclose on you and dump your loan. [/QUOTE] Which banks are you referring to? I am talking about a situation, and this really is hypothetical, where a person bought a home four years ago for, say, $300,000 with an Jumbo Option ARM. Now the house is worth $210,000 because of the falling market. The homeowner is current on the loan, but doesn’t like being $90k upside down. In the current situation, the lender would not allow the homeowner to opt into the bailout plan and take the loss. My question is, what would prevent said homeowner from missing four or five payments to get near foreclosure so that Freddie Mac or Fannie Mae would step in with a good fixed rate loan on the new value of $210,000 giving the homeowner much lower payments? Since the homeowner is now on the cusp of foreclosure, wouldn’t the lender be far more likely to let them out of the loan? I understand that it would trash a homeowner’s credit, but some people may consider it worth $90,000 to trash one’s credit.. ---
**Author:** ![mazinger\_z](https://avatars.discourse-cdn.com/v4/letter/m/5f9b8f/32.png) [@mazinger\_z](https://boards.straightdope.com/u/mazinger_z)\ **Post date:** [July 30, 2008, 3:59pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/4 "2008-07-30T15:59:34Z")
[QUOTE=jtgain] Which banks are you referring to? I am talking about a situation, and this really is hypothetical, where a person bought a home four years ago for, say, $300,000 with an Jumbo Option ARM. Now the house is worth $210,000 because of the falling market. The homeowner is current on the loan, but doesn’t like being $90k upside down. In the current situation, the lender would not allow the homeowner to opt into the bailout plan and take the loss. My question is, what would prevent said homeowner from missing four or five payments to get near foreclosure so that Freddie Mac or Fannie Mae would step in with a good fixed rate loan on the new value of $210,000 giving the homeowner much lower payments? Since the homeowner is now on the cusp of foreclosure, wouldn’t the lender be far more likely to let them out of the loan? I understand that it would trash a homeowner’s credit, but some people may consider it worth $90,000 to trash one’s credit.. [/QUOTE] If the current lender bank or a future one to refinance with sees that the borrower is becoming a financial dead beat, then what incentive is there for either bank to refinance the loan? It’s better for them to take a loss and foreclose on the borrower. Sure, Fred or Fannie may guarantee the loan (up to 90%), but the lender isn’t required to make the loan happen. The costs of foreclosure far outweigh the profit that they may make. This act is definitely a benefit for the consumer, provided they do qualify for the loan, because ultimately, they still have the ability to walk away and leave the bank (and government) holding the bag. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [July 30, 2008, 4:48pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/5 "2008-07-30T16:48:37Z")
The bank does not want the house. They have lots of empty houses. They may redo a loan rather than foreclose . Asking them to would be a logical first step. ---
**Author:** ![TJVM](https://avatars.discourse-cdn.com/v4/letter/t/b38774/32.png) [@TJVM](https://boards.straightdope.com/u/TJVM)\ **Post date:** [July 30, 2008, 6:11pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/6 "2008-07-30T18:11:51Z")
It’s not mentioned in the article linked in the OP, but according to [this analysis](http://www.bankrate.com/brm/story_content.asp?story_uid=26165&prodtype=mtg) (look under “The Good”) the bank has to forgive the loan balance above 90% of the home’s current value. So, it sounds to me like the bank has effective veto power over this option. Of course, you could try to convince the bank to go along by feigning financial difficulty and missing some payments, but if the bank calls your bluff, you could wind up in foreclosure. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [July 30, 2008, 7:33pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/7 "2008-07-30T19:33:43Z")
[QUOTE=jtgain] Well, since you are current, your lender probably won’t let you out of your loan. What would stop someone from not paying for a few months right up until foreclosure time so that he/she would qualify for the program? Are there not safeguards built in? [/QUOTE] 1. You have to certify that you didn’t default on purpose. If that statement isn’t true, you’ve committed a federal crime. 2. Monthly mortgage payments, including principal, interest, taxes and insurance, must be at least 31 percent of monthly income, as of March 1, 2008. [http://www.courant.com/business/hc-mortgage0729.artjul29,0,5538506.story](http://www.courant.com/business/hc-mortgage0729.artjul29,0,5538506.story) Here is the law, by the way: [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110\_cong\_bills&docid=f:h3221enr.txt.pdf](http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h3221enr.txt.pdf) > [@](#): > > ``` > (e) Requirements of Insured Mortgages- To be eligible for insurance under this section, a refinanced eligible mortgage shall comply with all of the following requirements: > > `(1) LACK OF CAPACITY TO PAY EXISTING MORTGAGE- > > `(A) BORROWER CERTIFICATION- > > `(i) IN GENERAL- The mortgagor shall provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt, and has not knowingly, or willfully and with actual knowledge, furnished material information known to be false for the purpose of obtaining any eligible mortgage. > > `(ii) PENALTIES- > > `(I) FALSE STATEMENT- Any certification filed pursuant to clause (i) shall contain an acknowledgment that any willful false statement made in such certification is punishable under section 1001, of title 18, United States Code, by fine or imprisonment of not more than 5 years, or both. > > `(II) LIABILITY FOR REPAYMENT- The mortgagor shall agree in writing that the mortgagor shall be liable to repay to the Federal Housing Administration any direct financial benefit achieved from the reduction of indebtedness on the existing mortgage or mortgages on the residence refinanced under this section derived from misrepresentations made in the certifications and documentation required under this subparagraph, subject to the discretion of the Secretary. > > `(B) CURRENT BORROWER DEBT-TO-INCOME RATIO- As of March 1, 2008, the mortgagor shall have had a ratio of mortgage debt to income, taking into consideration all existing mortgages of that mortgagor at such time, greater than 31 percent (or such higher amount as the Board determines appropriate). > > `(2) DETERMINATION OF PRINCIPAL OBLIGATION AMOUNT- The principal obligation amount of the refinanced eligible mortgage to be insured shall-- > > `(A) be determined by the reasonable ability of the mortgagor to make his or her mortgage payments, as such ability is determined by the Secretary pursuant to section 203(b)(4) or by any other underwriting standards established by the Board; and > > `(B) not exceed 90 percent of the appraised value of the property to which such mortgage relates. > > `(3) REQUIRED WAIVER OF PREPAYMENT PENALTIES AND FEES- All penalties for prepayment or refinancing of the eligible mortgage, and all fees and penalties related to default or delinquency on the eligible mortgage, shall be waived or forgiven. > > ``` ---
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [July 31, 2008, 11:18am UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/8 "2008-07-31T11:18:43Z")
[QUOTE=Gfactor] 1. You have to certify that you didn’t default on purpose. If that statement isn’t true, you’ve committed a federal crime. [/QUOTE] Thanks for the cite. It still seems like a hollow provision, though. Unless you call up the bank and taunt them about how you scammed your way out of their loan, I don’t see how they can prove that you intentionally defaulted. I’m glad that this will help some people keep their homes, but I can forsee a rise in defaults on mortgages from people who want to try to get into this program. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [July 31, 2008, 12:42pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/9 "2008-07-31T12:42:15Z")
[QUOTE=jtgain] Thanks for the cite. It still seems like a hollow provision, though. [/QUOTE] Certainly. The statue only outlines the skeleton of this program. There will be underwriting guidelines built around the intentional default issue for sure, both for the loan forgiving servicer and the new lender. They haven’t been written yet. They’ll be part of the roll out of the program. I expect they’ll look at things they already ask for, like verifications of income and deposit; they may also ask for an accounting of where your paycheck went for the last x months–I don’t know. The clumsier scammers will get caught in that net. Some will definitely slip through. How would you set up the system to prevent intentional defaults? ---
**Author:** ![JSexton](https://avatars.discourse-cdn.com/v4/letter/j/96bed5/32.png) [@JSexton](https://boards.straightdope.com/u/JSexton)\ **Post date:** [July 31, 2008, 5:34pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/10 "2008-07-31T17:34:03Z")
[QUOTE=jtgain] Thanks for the cite. It still seems like a hollow provision, though. Unless you call up the bank and taunt them about how you scammed your way out of their loan, I don’t see how they can prove that you intentionally defaulted. [/QUOTE] An audit would certainly show it. If you’ve had no problem making your payment for the last few years, and your income is the same, and you’ve incurred no recent large expenses, then you’d be hard-pressed to demonstrate a reason why you can no longer pay. And you’d be hosed. ---
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [July 31, 2008, 5:47pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/11 "2008-07-31T17:47:00Z")
[QUOTE=JSexton] … then you’d be hard-pressed to demonstrate a reason why you can no longer pay. And you’d be hosed. [/QUOTE] But according to Gfactor’s cite, there is no burden on the homeowner to demonstrate why they can no longer pay. The burden would be on the government to prove, beyond a reasonable doubt, that the homeowner intentionally defaulted. And along with that, I can see a regulation implementing the law making you provide an accounting to get the loan, but no teeth in the law as to what is accepted. What if I say that in the last six months, I have developed a habit of taking my paycheck to the local strip club and pissing it away on lap dances and mixed drinks, so there is no money left over for the mortgage? I didn’t mean to not pay, your honor, I just have an addiction to alcohol and loose women. The thing is, I’m afraid this will tank like most government plans. Most plans help three worthy people and a million who don’t deserve help, while another million who need help never get it. There are people out there who know how to work the system, and I can see them getting great rates to refinance their crack house. We shall see, though.. ---
**Author:** ![Gfactor](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@Gfactor](https://boards.straightdope.com/u/Gfactor)\ **Post date:** [July 31, 2008, 6:15pm UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/12 "2008-07-31T18:15:28Z")
[QUOTE=jtgain] But according to Gfactor’s cite, there is no burden on the homeowner to demonstrate why they can no longer pay. [/QUOTE] As in any criminal case, the burden is on the government to prove guilt beyond a reasonable doubt. Whether you get the loan in the first place is another question. HUD issues guidelines for underwriting FHA-insured loans. If a mortgagee insures loans (most mortgagees have delegated endorsement authority for FHA loans–that means they make the original decision to insure loans they close, subject to review by HUD) that don’t meet the guidelines, that mortgagee will suffer severe consequences (losing HUD approval in this market pretty much means death; there are other consequences that are less severe, but not by that much right now). Moreover, the current loan servicer has to agree to a significant write down. They will want to take a careful look at any request, and may, as I said before, ask for an explanation for the default and back up documentation. If your explanation was that you’re addicted to drugs and voyeurism, it’s unlikely the servicer will agree to the write down, and even less likely that your explanation will meet the requirements for the new program because that’s independent of the reasons for the new program, and is likely to continue after the refi. ---
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [August 4, 2008, 1:57am UTC](https://boards.straightdope.com/t/new-home-mortgage-bail-out-law/458172/13 "2008-08-04T01:57:54Z")
[QUOTE=Gfactor] …If your explanation was that you’re addicted to drugs and voyeurism, it’s unlikely the servicer will agree to the write down… [/QUOTE] Again, you make good points, but I don’t understand this one. Doesn’t the current mortgage holder only look at their own bottom line? Why would they care what the reason is that I cannot pay? Whether my reason is good, bad, self-imposed, or otherwise, wouldn’t they want to let me go or keep me based upon their own evaluation of my ability to pay them? And, another related question, people say thinks like “talk to your bank” and “discuss your problems with them”. I wouldn’t think that this is like owing your next door neighbor 20 bucks. Banks have rules imposed by the federal government, and I’m sure that there is policy, etched in stone, as to what mortgages they will let go and which ones they will keep. I’ll bet that their customer service lines are flooded with sad stories as to why people can’t pay. Any relief or modification of plans would have to be done under an objective set of rules to prevent lawsuits, no?