December 5, 2007
Subprime Q&A: What does plan mean? Whom does it help?
Opinion
By SUE KIRCHHOFF
USA Today
WASHINGTON — The Bush administration, banks, bond firms and mortgage servicers rolled out a proposal Thursday to help people in higher-cost adjustable-rate subprime mortgages more quickly and easily refinance or modify their loans — including freezing interest rates at the initial teaser rate for five years. Following are questions and answers about the initiative.
Question: What are subprime loans?
Answer: Subprime mortgages are higher-priced products aimed at consumers with poor or spotty credit histories. The subprime industry has soared from a niche product a decade ago to 20 percent of the overall mortgage market last year. Subprime loans were increasingly rolled into bonds and resold on financial markets, and the meltdown of the market led to the current credit crunch.
Q. Why is the Bush administration getting involved in the mortgage markets?
A. As home sales and prices have plummeted in many areas in recent months, delinquencies among borrowers with subprime loans have soared. The Mortgage Bankers Association on Thursday said 19.6 percent of subprime adjustable-rate loans, or 600,000 mortgages, were at least one payment late at the end of the third quarter. The problem is expected to worsen significantly, with 1.8 million adjustable-rate subprime mortgages poised to reset, to often sharply higher rates.
Q. Are taxpayers bailing out subprime borrowers?
A. Treasury Secretary Henry Paulson has been emphatic that no taxpayer money is involved in the current effort. Instead, the government persuaded the financial industry to work out voluntary guidelines to more quickly refinance loans when possible, freeze rates for five years or longer when needed and continue to modify mortgages on a case-by-case basis.
Q. How many will benefit?
A. The program covers subprime adjustable-rate loans that were made from Jan. 1, 2005, to July 31, 2007, and will reset from Jan 1. 2008, to July 31, 2010. Industry officials estimate that of the 1.8 million loans in this category, 600,000 borrowers can’t afford their loan, even at the initial rate.
Of the other 1.2 million borrowers facing resets, about half are likely to be able to refinance their loans, and the rest qualify for a freeze or modification. Borrowers with more than 3 percent equity in their homes are candidates for a refinance, possibly under a government program.
Q. How do borrowers know if they qualify for a rate freeze?
A. To be on the fast track for a five-year or longer freeze, borrowers must live in their homes, be current on the loans and not have missed more than one mortgage payment in the previous 12 months. Other criteria qualifying for fast track include borrowers with credit scores under 660 who are facing a reset that would cause payments to jump more than 10 percent.
Q. What if you don’t qualify for a freeze but are still struggling with your loan?
Subprime borrowers who don’t automatically qualify for a rate freeze could have their loans modified on a case-by-case basis. Non-subprime borrowers should also contact their loan servicers if they are worried about their loans.
Q. Who pays?
A. Investors who hold bonds backed by the mortgages could take a hit by losing potentially higher returns. Still, the American Securitization Forum, which represents the bond industry, says the industry’s newly crafted guidelines brokered by the administration comply with legal requirements for modifying loans in bonds and are designed to protect the economic interests of investors. Financial industry officials expect lawsuits about the proposal. But Michael Heid of Wells Fargo Home Mortgage says he considers the industry more vulnerable to litigation without the broad guidelines. Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., which regulates many U.S. banks, says investors are better off even if rates are frozen for five years, noting foreclosures can cost as much as half the original loan.