Government Announces New Tool To Combat Foreclosures – Loans That Don’t Need To Be Paid Back

Many families in America are continuing to fight the battle with foreclosure.  Too many are losing.  In response to the ongoing mortgage crisis, the government has announced a new tool that it hopes will help stem the tide of foreclosure and keep more families in their homes.

 A couple of weeks ago, Washington unveiled the Emergency Homeowners Loan Program.  In it, the government is offering loans of up to $50,000 to homeowners who have lost a job and are currently in a hardship situation.  Here’s the real kicker – if the homeowner meets certain criteria, these loans don’t need to be paid back.  Now, before you go running off to the internet to apply for one of these loans, let’s look at the pros and cons of this seemingly free money offer.

Bank owned

 This offer is interesting in that if the homeowner is able to meet all the criteria and essentially earns $50,000 free from the government, this can be a great help in getting these folks back on their feet and in the black again.  But if the homeowner doesn’t meet all the requirements laid out in the loan agreement, they need to pay that loan back in full and that could ultimately land the homeowner in an even worse position than when they started.

 Homeowners receiving the assistance pay it back on a monthly basis just as they would they’re original mortgage.  The payment goes to pay off the outstanding balance on their mortgage.  The assistance period for this loan can last up to two years.  Once that two year period is up, 20% of that loan balance per year will be completely forgiven so long as the homeowner keeps current with their mortgage payments.  That would mean that the entire loan would be forgiven in five years after the assistance period has ended.

 This sounds like a good deal but homeowners who qualify for these loans (the ones who’ve lost a job and are quite possibly seriously behind on their mortgage) might find it a bit challenging to stay current on their mortgage payments for seven full years after receiving this loan.  To make matters worse, if they fall behind on their mortgage again or decide to sell the house before the end of the loan, the homeowner will be on the hook for the entire balance remaining on it.  That means they could ultimately be in deeper debt thanks to this program than when they started.

If you believe you might qualify you can make your application to be considered for the program at ehlp.nw.org.  Applications are being taken through July 22nd and you’ll need to provide proof of job loss and loss of income.  But you may want to proceed with caution.  I think the intent with this program is good but the potential unintended consequences could be worrisome (and it may not end up reaching as many people as intended either).  This could be the helping hand you need to pull yourself out of the valley but it could also make things worse.

When the government extends you a helping hand it’s sometimes best to push that hand away.

Photo credit: Nick Bastian

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

One Response to “Government Announces New Tool To Combat Foreclosures – Loans That Don’t Need To Be Paid Back”

  1. Super Saver |  Jul 31, 2011 at 8:14 pm

    Another government bailout that won’t help. If it’s such a great idea, why not give $50,000 to every household. The logic being if $50,000 will help when given to a few, then giving the amount to more people should even help more.

    Just another cash for clunkers or homebuyer’s credit program, with likely the same long term non-impact.