Due to the continuing decline of the real estate market, many people are beginning to ask whether the mortgage relief plan outlined by the Bush administration to alleviate a portion of the subprime adjustable-rate mortgage crisis will benefit them.
In short, no. The optimism surrounding the plan centers on the promise of an interest rate freeze for existing at-risk borrowers for five years. The plan is merely window dressing, however, because it applies only to a narrow group of borrowers and mortgage types.
Specifically, the plan will impact only subprime adjustable rate mortgages (ARMs) that originated between January 1, 2005, and July 31, 2007, and whose interest rates will reset for the first time between January 1, 2008, and July 31, 2010. Critically, it applies only to loans that were packaged into securities and not those that are held by banks on their own books. In other words, if you have a loan held by Countrywide, Wells Fargo, Washington Mutual, Bank of America, Citimortgage, to name just a few, the Bush plan will not apply to you.
Simply put, the plan is unclear, insufficient and misplaced. Indeed, the Bush plan does not even explain which loans qualify because it does not identify what is meant by subprime ARMs. Generally, these loans carry a fixed interest rate for the first two or three years, and then adjust upward annually. Absent some clear explanation by the White House as to what constitutes a subprime loan, many people who may qualify for a rate freeze will find themselves in the dark.
Perhaps most importantly, the lenders are tasked with the responsibility of creating the guidelines for borrower eligibility to obtain an interest rate freeze. In other words, not only does the Bush administration have to identify what subprime means, but the related lenders then have to explain who qualifies. Current statements of the government claim that to qualify for the rate freeze, each borrower must live in the home and face a payment increase of more than 10% of their current loan payments when the interest rate on their ARM resets for the first time. To qualify for the fast-track program, borrowers must have a credit score of less than 660 and each borrowers credit score cannot improve by more than 10% since the mortgage was originated. Finally, borrowers can have only one 60 day late payment during the last 12 months leading up to the rate freeze. Although the Bush administrations attempted bailout of the housing freefall may appear to be in good faith, it punishes those that worked diligently to buy a home and improve their credit scores.
The government stated this program will help approximately 1.2 million people. Commentators, however, have expressed doubt and analysts at Barclay Capital estimate that only 240,000 borrowers can expect any relief under this plan. Clearly the housing recession is far from over and the Bush plan is no panacea.
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