$700B Bailout Includes Mortgage Relief for Distressed Homeowners

This week the $700 billion bailout legislation was finally approved by the Congress. In addition to the purchase of bad mortgage-related assets from distressed financial corporations, it included measures that will provide assistance to homeowners on the verge of foreclosure.

With the bailout bill, it is now possible for troubled borrowers to refinance as much as 87 percent of their subprime mortgage’s present market value and shift to fixed-rate mortgages. The remaining value of the loan will be written off by the subprime mortgage lender. On the other hand, 90 percent of the FHA loans will be refinanced.

Obviously, such option can only be considered by homeowners whose finances can handle the renegotiated loans. As you know, many of the subprime borrowers were approved for loan amounts that they could not afford in the first place. It made matter worse for these homeowners since most of them were convinced to take out hybrid loans with, which resulted to ballooning mortgage payments.

Critics of the bailout bill were concerned with the toll on taxpayers. But supporters believe that the cost of helping these distressed financial firms will not actually reach $700 billion since the government will be able to recoup some of the money through the re-sale of the mortgages and the other assets.

Initially, the bailout bill will supposedly cost the government $70 billion. Although this may not be felt by the taxpayers, analysts believe that the government will have difficulties sorting through that rubble. It could even take them years to finally assess the worth of these troubled mortgages and foreclosure properties.

And to protect the nation from another mortgage-related disaster, legislators are focusing on tightening the financial industry’s guidelines and regulations. Companies like the American International Group used earnings from their insurance business and placed them in high-risk securities. Such “credit default swaps” were the reason for its downfall.

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