If you have one of those "teaser" rates on a home, pay close attention. Keep making your payments on time, and answer the phone when your lender calls you! Homeowners who follow those two rules may take advantage of a plan to prevent mass foreclosures. The initiative, released Dec. 6, was dreamed up by bankers and federal regulators. Known as the "Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans." It's as complicated as the name implies.
But for now, the advice is simple:
"What's most important under this protocol is to stay current on your loan," Sheila Bair, chairman of the Federal Deposit Insurance Corp. And, she added, get on the phone to your loan servicer.
Help is coming in three ways
Subprime adjustable-rate mortgages are known as 2/28 and 3/27 ARMs. They have teaser rates for the first two or three years. After that, the rates jump, and monthly payments can rise hundreds of dollars.
Almost 2 million subprime borrowers face rate reset in 2008 and 2009. Experts worry that a this will force more homeowners into foreclosure. Bair came up with an idea to prevent foreclosures by freezing the introductory rates on subprime ARMs last summer.
Treasury Secretary Henry Paulson adopted Bair's idea. Paulson gathered lenders, mortgage servicers and investors under the umbrella of a group called the Hope Now Alliance and brokered the deal that was announced Dec. 6.
Under the Paulson plan, mortgage servicers have a set of guidelines that they can use to classify subprime customers into four categories.
| • | Hopeless cases who can't afford their payments under the teaser rates. |
| • | Those who can afford their mortgages even after the rates reset and the monthly payments jump. |
| • | Homeowners who can refinance into another loan, possibly one insured by the Federal Housing Administration. |
| • | People who can afford the teaser rate, but can't afford a higher rate, and who can't refinance because they owe more than the house is worth. |
Most of the attention to the Paulson plan focuses on that final group. Those homeowners will be offered a deal: Keep making the monthly house payments, and the teaser rate will be extended for five years. No need to worry about the monthly payment jumping by hundreds of dollars. Well, not for five years.
Experts estimate about 1.8 million homeowners have subprime ARMs that will reset in 2008 and 2009. Of those, about 1.2 million will either be able to refinance or will be offered an extension of the teaser rate. No one offered an estimate of how those 1.2 million will be split up into each of those categories.
Qualifying for the rate freeze
The rate freezes will be offered to people whose subprime ARMs hit their first reset sometime between Jan. 1, 2008 and July 31, 2010. Most of these borrowers have loans with interest rates between 7 percent and 10 percent. That's substantially higher than current mortgage rates for people with good credit. This week, the benchmark 30-year fixed in Bankrate.com's weekly survey was at exactly 6 percent.
To be eligible for a five-year extension of the teaser rate, a borrower will have to be current on the monthly house payments, and not to have fallen behind by more than 60 days within the last year. In addition, the amount owed on the primary mortgage must be more than 97 percent of the home's value. Because home values have fallen, a lot of people will meet that criterion.
Mortgage servicers are encourage to contact borrowers at least four months before the initial rate reset to warn about the higher payments and to discuss the options available.
So if your lender calls you, answer the phone!
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