It sounds like a good idea. If the reason so many people are losing their homes is because interest rates are too high, then let’s keep those rates low and prevent foreclosures. That’s the essential proposal announced by President Bush to contain the foreclosure crisis, a plan which would organize troubled subprime borrowers into three groups:
Segment 1: Those who are current on their payments and have the ability to refinance. In this case, efforts will be made to refinance without the imposition of prepayment penalties.
Segment 2: Those residential borrowers who are current on the their payments but not qualified to refinance would be allowed to freeze payment levels at introductory rates for up to five years.
Segment 3: Lenders and loan servicers will work with residential borrowers not current on their loans and unable to refinance into any existing loan product, the borrowers most likely to be foreclosed. Lenders will determine if the loan can be modified with a rate or principal reduction, forbearance, a short sale, a short payoff or foreclosure.
The plan was developed by the White House, Treasury Department and HUD in conjunction with a private group, the American Securitization Forum (ASF) — an entity which describes itself as “the securitization industry’s unifying forum, converting ideas into action to enhance and improve the securitization market.”
Will this plan work? Will it make a significant dent in the foreclose meltdown? The actual specifics of the plan raise a number of interesting issues:
What’s the scope of the program?
According to ASF, the program applies to:
First lien, subprime residential adjustable rate mortgage (ARM) loans;
That have an initial fixed rate period of 36 months or less;
That were originated between January 1, 2005 and July 31, 2007;
Are included in securitized pools;
And will re-set between January 1, 2008 and July 31, 2010.
In other words, all loans with re-sets before 2008 are done deals: the program does not apply to borrowers who are now in trouble because of existing re-sets or troubled investors.
Does the new program apply to predatory loans, financing where borrowers have been grossly overcharged?
The term “predatory” does not appear in the guidelines.
What about situations where borrowers financed with “piggy-back” mortgages, say an 80 percent first lien and a 20 percent second?
The second lien is a separate contract between a borrower and a lender. Normally if a first lien is paid off or refinanced, the second lien automatically moves up and becomes a first lien. This is important because if a property is foreclosed, the first lien must be completely repaid before any money is available for other loan pay-offs.
The ASF says that under it’s plan if a lender agrees to refinance a first lien then “any second lien holder will need to agree to subordinate their interest to the refinanced first lien.” However, there’s no rule or law that requires a second lien holder to give up their rights.
What do the guidelines mean by “current”?
The ASF guidelines do not require payment perfection. Instead, they generally define “current” to mean that in the past year the loan was not more than 60 days delinquent and that it’s not more than 30 days late at the time of refinancing.
What kind of new loans are contemplated for borrowers under the plan?
The basic idea is to move borrowers into FHA loans, especially the FHASecure mortgage, a loan product designed specifically to help borrowers with toxic loans. The FHASecure guidelines basically ignore late or missed payments related to loan re-sets.
The use of the FHA program benefits both borrowers and lenders. Borrowers are ahead because FHA loans typically have lower rates and costs than subprime loans, plus they don’t have prepayment penalties. As to lenders, they benefit because when loans are refinanced the entire debt is repaid, a much better option than defaults and foreclosures.
What about prepayment penalties?
Prepayment penalties are within loan contracts and can only be waived at the option of the lien holder. If this is not possible, the FSA guidelines say the servicer should “facilitate a refinance in a manner that avoids the imposition of prepayment penalties wherever feasible. This may be accomplished by timing the refinance to occur after the upcoming reset date.” In other words, the terms of the mortgage contract cannot be changed without the agreement of the lender — and the lender may not agree. What the FSA is proposing is a work-around.
Are there qualification tests for Segment 2?
Yes. For instance, if your current FICO score is less than 660 and is not more than 10 percent above the score you had at origination then you can meet the “FICO test.” Also, you must be an owner-occupant and your re-set must raise your monthly payment by at least 10 percent.
You mean if my credit score is now above 660 because I’ve paid down debts and gotten a better job that I may not qualify under Segment 2?
Yes. However, with a higher score you may be able to refinance with another lender.
I’m in Segment 3. What are my options?
You should contact your lender or servicer immediately. Possible options include a rate reduction or principal forgiveness, forbearance, a short sale, a short payoff, or foreclosure.
Does this mean that under the guidelines I can still be foreclosed?
I have a toxic loan, but I have good credit and I’m not a subprime borrower. My payment is going up 30 percent. Will the new program help me?
No. The program is restricted to subprime borrowers. If your credit score is above 660 you will not qualify under the program. Most probably you’re an “Alt-A” borrower, someone with good credit who financed a home purchase with an option ARM or an interest-only mortgage.
Must all lenders and servicers follow the ASF guidelines?
No. The guidelines are voluntary and not the result of any new regulation, rule or law.
“The Bush administration’s rescue plan impacts a limited number of homeowners and even those within the criteria will only have a temporary reprieve,” says the Neighborhood Assistance Corporation of America, (NACA). “Freezing interest rates temporarily is analogous to having a defective automobile with no brakes, and rather than fix the brakes, you are allowed to park it while making the payments and then drive it down the hill full speed. The inevitable result will be a crash or in mortgage terms — foreclosure.”
“The limited scope of the announcement will be disappointing for the millions of homeowners at risk of foreclosure,” said Bruce Marks, NACA’s CEO. “President Bush is abandoning the approximately one million homeowners already on the brink of foreclosure.”
“The ASF guidelines are an important step forward in the sense that clear standards have been outlined to help troubled borrowers going forward,” says James J. Saccacio, chairman and chief executive officer of RealtyTrac, the largest online marketplace for foreclosure properties. “However, the program is not enforceable, does not apply to all toxic mortgages, ignores middle-income borrowers, works against those who have struggled to build-up their credit but remain saddled with nontraditional financing, and will not help those who are now in trouble because of exploding ARM re-sets. That’s a list of exceptions which is just too long. More will need to be done.”
Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers.