| Subprime Mortgage Loan Qualifications |
| By Credit Federal |
Published
12/7/2007
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Home Loan
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Subprime Mortgage Loan Help
Treasury Secretary Henry Paulson announced on Thursday details of a plan to freeze interest rates on hundreds of thousands of subprime mortgages, hours after new data showed a record number of homeowners went into foreclosure in the third quarter. None of them will be eligible for financial relief under the proposal.
Nearly one in five homeowners with subprime adjustable rate loans; around 600,000 borrowers, were in default in the July-September quarter. But the rescue deal forged by regulators and the mortgage industry is designed to help 1.2 million who have subprime ARMs that would reset to higher rates starting next year through mid-2010.
The plan won't help borrowers with prime ARM loans, either. Those loans accounted for nearly 19% of foreclosures begun in the third quarter - another record high. That figure is expected to surge even further in the next two years as more of those mortgage loans reset to higher rates. The pain will be particularly severe in California and Florida, which accounted for 42% of the new prime ARM foreclosures last quarter.
The mortgage industry estimates that half of those eligible will have their rates frozen; the other half should have the financial strength to refinance into a fixed-rate loan.
The alarming pace of foreclosures is threatening to send the real estate market deeper into recession and drag the economy down with it. After one of the most spectacular booms in history, fueled by flagrantly imprudent lending, the real estate market is suffering the biggest correction since the Great Depression, Zandi says. Home prices this year will post their first average annual drop since World War II, and will drop again next year, the Mortgage Bankers Association projects.
A national 24-hour hotline exists for borrowers in financial trouble: 888-995-HOPE. But some credit counselors, already overwhelmed with calls, complain that loan-servicing companies lack the staff to handle the crushing caseload.
Even as the average interest rate on a 30-year fixed-rate loan fell last week to 5.96%, the lowest point since September 2005, many subprime ARM borrowers will have trouble refinancing under the Bush administration's plan. That's largely because the qualifications are strict. Borrowers must live in the home and cannot have missed more than one payment in the past 12 months.
More than half the borrowers who got subprime ARMs last year, for example, provided little or no documentation of their income. These loans are nicknamed "liar loans" in the industry. It's unclear how many borrowers who got this type of loan will be able to qualify for a new loan.
In September, the Federal Housing Administration launched a loan insurance program called FHASecure, designed to help borrowers refinance out of their subprime ARM loans. In the first three months, the FHA received 111,000 applications for the FHASecure loan but has funded fewer than one-third.
At least one thing is clear about President Bush's plan to help people trapped by the mortgage meltdown: it is an industry-led plan, not a government bailout.
Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers.
The plan was the target of criticism from consumer advocates who said its scope was too narrow, and from investment firms, who said it went too far. Others warned that the plan, by letting some stretched homeowners off the hook, could encourage more reckless borrowing in the future.
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