On December 6, 2007, President Bush announced that his administration and a coalition of lenders had negotiated an agreement with lenders to freeze interest rates for five years on some of the subprime mortgages that are scheduled for interest rate adjustments in the coming months. Specifically, lenders will make streamlined refinancing or loan modifications available for homeowners with loans that meet the criteria.

The interest rate freeze feature targets the approximately 1.2 million subprime, adjustable-rate mortgage loans on owner-occupied homes that originated between January 1, 2005, and July 31, 2007, and have an initial interest rate reset between January 1, 2008, and July 31, 2010. These subprime mortgages – typically loans provided to borrowers with spotty credit histories – had introductory interest rates of around 7 to 8 percent that will reset to levels as high as 11 percent, adding hundreds of dollars to typical monthly mortgage payments.

Qualifications 

Only homeowners who have FICO scores less than 660 and are facing an increase in monthly payments greater than 10 percent will be eligible for fast-track loan modifications and the five-month interest freeze. These borrowers cannot have missed any mortgage payments, must have less than three percent equity in their homes, and must be living in their homes.

Borrowers who do not meet the “FICO test” may qualify for loan modifications after individual reviews of their current income and debt obligations.

Although the Bush administration says up to 1.2 million ARM loans may be eligible for refinancing or modifications, the Center for Responsible Lending estimated that only around 145,000 will actually see any relief because most will be excluded by the plan criteria.

Exclusions 

The refinancing and loan modification relief does not apply to the estimated 22 percent of all subprime borrowers who are delinquent on their payments and does not help the hundreds of thousands of borrowers whose introductory interest rates reset to unaffordable levels before January 1. The plan excludes owners of second homes or investors because they do not live in the property facing foreclosure and people who are financially secure enough to pay the higher mortgage payments. In addition, the plan will not cover “payment option” adjustable rate loans that are not typically considered subprime loans but also will face significant rate resets.

In other words, the plan will assist homebuyers with bad credit and minimal equity in bad loans who somehow have managed to make their mortgage payments at the introductory rate. It is hard to imagine that this will encompass as many homeowners as was hoped, but the government and the lenders were reluctant to engage in a wholesale bailout of consumers who made ill-advised financial decisions.

Download a PDF about the interest rate freeze plan at www.wra.org/irfreeze08.

Default and Foreclosure Rates 

The Mortgage Bankers Association has reported that 5.59 percent of all home loans have payments that are more than 30 days late and 1.69 percent of all home loans are in foreclosure. In Wisconsin, 4.61 percent of all home loans were 30 or more days overdue and 1.95 percent of home loans are reportedly in foreclosure.

National Mortgage Statistics 

• Number of families who now hold a subprime mortgage: 7.2 million
• Proportion of subprime mortgages in default: 14.44 percent
• Number of subprime mortgages made in 2005-2006 projected to end in foreclosure: 1 in 5
• Families with a subprime loan made from 1998 through 2006 who have or will lose their home to foreclosure in the next few years: 2.2 million
• Projected maximum equity that will be lost through foreclosure by families holding subprime mortgages: $164 billion
• Proportion of subprime mortgages made from 2004 to 2006 that come with “exploding” adjustable interest rates: 89-93 percent
• Proportion approved without fully documented income: 43-50 percent
• Proportion with no escrow for taxes and insurance: 75 percent

Source: Center for Responsible Lending – A Snapshot of the Subprime Market, December 10, 2007: www.responsiblelending.org/issues/mortgage/quick-references/a-snapshot-of-the-subprime.html

Debbi Conrad is Director of Legal Affairs for the WRA.