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A Program to Keep the Roof Over Your Head -- but It Will Cost You in the Long Run

By Michelle Singletary
Sunday, October 19, 2008

For homeowners trying to renegotiate their loans under the government's new HOPE for Homeowners program, please read the paperwork carefully -- because once again, you'll be stuck with a costly mortgage deal.

HOPE for Homeowners, nicknamed H4H, became law this summer to help keep homeowners from defaulting on their mortgages and going into foreclosure. 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. Additionally, they are only allowed to put people in 30-year, fixed-rate loans.

The Federal Housing Administration will insure up to $300 billion of these new loans. As many as 400,000 homeowners could avoid foreclosure through H4H 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.

I know people are desperate to keep their homes, but they need to understand that H4H is an expensive rescue program. There is a great benefit upfront -- you get to keep your home.

But there is a significant cost to homeowners at the back end. If you take this deal, you have to split the initial equity created by the write-down of the mortgage with the 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.

"It's outrageous," says John E. Taylor, president of the National Community Reinvestment Coalition.

For example, let's say your home has a current 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 appraised value.

So at the start of the H4H 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.

In addition to this upfront equity-sharing, if your home increases 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 the FHA minus any closing costs and a portion of any improvements you have made. This is a 50/50 split that does not change over time.

So, staying with the previous example, if you sell your home for $250,000 in a few years, FHA would collect $25,000 (half of the appreciated value of $50,000).

There are other rules worth noting. H4H participants are also barred from taking out second mortgages unless the money borrowed is used 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. Typically, FHA-backed loans carry a half-percentage point annual premium.

With so many caveats to this program, many lenders will probably balk at participating. What's better for homeowners is for lenders to provide them with an affordable monthly mortgage payment through a loan modification.

I'm troubled that many homeowners won't even realize the caveats of the H4H program because they won't pay attention to the details. They didn't before, when they got those nasty subprime loans that started this downward economic spiral. People were so focused on getting the lowest monthly mortgage payment starting out that they gave little, if any, consideration to how they could afford the loans once they reset to higher interest rates. Or they bet that refinancing would save the day. As we now know, that was a bad bet.

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.

"If this is your only choice, take it," Taylor said. "But just know that you are giving up half of the accumulated wealth in the home."

This time around, borrowers can't use ignorance as an excuse. All the funky particulars of this program are clear. H4H can save your home if you qualify, but pay attention to the details. Read the documents.

Be sure that the deal you are willing to accept now is a deal you can live with later.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

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