Bush Rate Freeze Proposal: Better than Nothing

With an estimated $1 trillion in outstanding ARM loans set to adjust in 2008, the number defaults are expected to be catastrophic. On Thursday it was announced that the Bush Administration has negotiated a rate freeze for homeowners in subprime loans that are adjusting beyond affordability. The plan attempts to curb the number of foreclosures being caused by Adjustable Rate Mortgages. Here are some of the preliminary details of the plan:

1. The freeze would fix a homeowner's initial interest rate that is attached to their 1st mortgage.

2. The freeze would apply to adjustable-rate mortgages originated between Jan. 1, 2005, and July 31, 2007, which would begin adjusting between Jan. 1, 2008, and July 31, 2010.

3. Only homeowners that occupy the home will be eligible. The program would not protect investors.

4. Those who have a 3 percent equity stake or more in their property also would not be eligible for the freeze.

The plan was developed through negotiations with the mortgage industry, led by the Treasury Secretary, Henry Paulson. President Bush claims that 1.2 million people could be eligible for help under the plan, however, only a small percentage will be subject to the rate freeze. Others would get assistance in refinancing with their current lender and moving into loans secured by the Federal Housing Administration, Bush said. These remarks refer to the new FHASecure Act that allows delinquent homeowners to qualify for an FHA-insured refinance.

Although this gives some hope, the plan is only expected to help the fringes and not all consumers who are in trouble. It also appears that the freeze may be optional for the lender and not required, raising more
doubts about how effective it will be.

The basic premise of the proposal is that those who currently have the financial ability to make their payments but would struggle to pay a higher reset rate could qualify for refinancing. However, with property values plummeting in areas with a high concentration of subprime mortgages, most homeowners can't get financing because their home value is lower than their mortgage balance.

Homeowners who have an ARM that adjusted prior to Jan. 1, 2008 but can't refinance for numerous reasons, are not eligible for the freeze. What the Bush Administration doesn't understand is that these ARM loans adjust every 6 months until they reach a "cap". The cap is typically between 11-14%, doubling the mortgage payment in 12 months. So there is a group of homeowners that might survive the first wave of their ARM reset but eventually they will fall behind.

The process for determining eligibility is manual and a homeowner must ask for help. The Home Ownership Preservation Foundation is handling consumer counseling free of charge. Thousands of borrowers who are falling behind on their payments have been sent letters about the options, and Bush also urged people to call a new hot line: 1-888-995-HOPE. Online the foundation can be reached by searching for the Home Ownership Preservation Foundation.