Today both President Bush and Treasury Secretary Paulson announced a very controversial plan to help home owners "avoid foreclosures that are preventable". Who qualifies to be saved? According to President Bush:
"We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could not afford…"
To me, this sounds like if you did a stated income loan and your reported income to the IRS is out of line with what you submitted and signed your name to on the loan application, you may be excluded from this program. The allowed debt-to-income ratios for many of the sub prime mortgage programs a few years back was 55%; I wonder if this plan will consider those with a 55% DTI "reckless"? Note: a 55% debt to income ratio is taking the borrowers monthly gross income and allowing them to have a mortgage payment up to 55% of that gross income.
According to Bloomberg, you will need the following to qualify for the five year fix:
"The freeze may apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said a person familiar with the plan. Borrowers whose credit scores are below 660 out of a possible 850 and haven’t risen by 10 percent since the loan was sold will be given priority.
Those with scores above 660 will be more closely scrutinized to determine whether they are eligible or must continue making payments under existing terms…"
This follows Paulson’s plan which he unveiled earlier on Monday. Paulson states there are four categories of subprime borrowers from Paulson’s press release on December 3, 2007:
There are those who can afford their adjusted interest rate; these homeowners need no assistance.
There are also a substantial number of homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again.
Homeowners who might choose to refinance their mortgage – putting them in a sustainable mortgage while keeping investors whole.
Those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate.
Those borrowers in Group 4 are the ones currently being focused on by the Government. So if you are able to afford your higher monthly payment (Group 1) you will not receive any benefit. If you’ve never been able to afford your mortgage (Group 2); you will not receive any benefit. If you chose to refinance now and take your home finances into your own hands (Group 3) you will not receive help from the Government. Under Paulson’s Plan, Group 4 will receive help.
I recommend meeting with your Mortgage Professional if you have an adjustable rate mortgage that is scheduled to adjust in 24 months or sooner. Don’t wait for someone to bail you out. Even if you feel your credit is great and you have a handle on your mortgage; an Annual Mortgage Review is more important than ever.
Much still remains to be seen on how this plan will work out.