it is not a gift from the taxpayers, the loss is absorbed by the original bank who wrote down the loan. the loss is not absorbed by the tax payers, HUD underwrites the loan with the expectation of getting half of equity at a future sale, which might benefit taxpayers...it hopefully will stabilize communities in the following way ( should have been passes months ago, would have prevented the debacle we have now)
22 Cherry Street, owned by Mr Smith, was bought for $250,000. It is now worth $200,000. Mr. Smith, upside down in his mortgage, unable to sell, will abandon the house. It now goes into foreclosure. This brings down the neighborhood, and negatively affects other values nearby. the house at foreclosure sells for $200,000, and the bank takes a loss for $50,000. Mr Smith's credit is now ruined keeping him from being a future home buyer.
Under the hope program, instead of abandoning an upside down house, Mr Smith has incentive to keep 22 Cherry Street and has it appraised for $200,000. HUD agrees to lend on it at 90%, with 10% equity for borrower, but when borrower sells, they give HUD half equity. The original bank takes the same loss they would have if in foreclosure, due to not having to pay attorney fees, maintain a house for months, pay closing costs, realtor commissions etc. 22 Cherry Street is now one less home on a flooded market. Mr. Smith saves his credit, and down the road will be able to buy another home. He sells 22 Cherry Street 4 years later for $230,000, splits difference with HUD, HUD has made money on the loan which helps keep financial system stable.
