Tuesday, December 11, 2007

Subprime Teaser Freezer Agreement

On December 6th, 2007, the Bush Administration announced an agreement among major loan servicing companies that is intended to help slow the foreclosure rate among subprime borrowers. In this article, we will cover three points. First, we will identify those who potentially qualify for this program. Second, we will discuss the benefits to both the borrower and the mortgage holder. Finally, we will tell you how to get started if you qualify for the program.

The program is targeted primarily at those borrowers who are currently in what are known as 2/28 or 3/27 loans. These two loan types represent the majority of loans that were provided to subprime borrowers. The interest rate is fixed for either two or three years, then adjusts. Typically, the first interest rate adjustment is in the 3% range. To illustrate the impact of such an adjustment, a $300,000 mortgage at 7% has a payment of $1750. At 10%, that same mortgage will have a payment of $2500. And this increase will take place in a single month.

To qualify for the Teaser Freezer Program:

-The property must be a primary residence. Second homes and investment properties don't qualify.
-The current mortgage must have been put in place between January 1, 2005 and July 31, 2007
-The start rate must adjust between January 1, 2008 and July 31, 2008
-The borrower can have been no more than 30 days late on mortgage payments within the last 12 months

Other qualifying factors:

Affordability - Can the borrower afford the higher payments?
Equity - Is there sufficient equity to refinance the mortgage?
Credit - Credit scores above a certain point may not qualify for the freeze

If the borrower meets the qualifications for this program, there are two potential solutions. The first option is that, if there is sufficient equity in the property and ability of the borrower to repay the loan, the bank may negotiate a new mortgage with the borrower under a streamlined approval process. The second option would be for the lender to simply freeze the initial interest rate for up to an additional five years. Either option is likely to stabilize the borrower's payments for a long enough time period for the borrower to avoid foreclosure.

The lenders will benefit from this solution as well. You will notice that borrowers who already cannot meet the teaser rate payments have been excluded from this agreement; these people are likely in such a position that they will be foreclosed upon or have to sell their homes in the near future anyway, so securing a payment that they are already unable to make will benefit neither the borrower nor the lender in these cases. The lenders want to avoid foreclosure wherever possible. A recent estimate showed the cost of a single foreclosure as $58,000 that the lender must absorb. In some situations, it's not unusual for lender losses to exceed $100,000 per foreclosed property. So collecting less than the planned interest rate on the mortgage securing a property that might otherwise go into foreclosure is a much better situation for the bank than having to absorb the cost of the foreclosure.

This is not a bailout; nobody gets to walk away free and clear. Those borrowers that negotiate longer fixed rate periods or new loans will have to pay the interest on those loans. They don't walk away with a lower interest rate, lower payments, or a larger house. The lender has to forgo the anticipated higher income from the loan; however, to be fair most lenders anticipated that the majority of these loans would be refinanced at or near the time of adjustment anyway. This program is not subsidized by any government agency. It's simply a make-sense agreement among the major loan servicing companies. And if it is successful in slowing the foreclosure rate, it will benefit everyone by more quickly bringing stability to the housing market.

Any borrower who potentially qualifies for this program needs to contact The Homeowner Preservation Foundation at 888-995-HOPE or www.995hope.org where they can reach a mortgage counselor who will guide them through the process.

Article by Dennis Martin