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. 

Watch President Bush’s speech from this afternoon by clicking here.

Read President Bush’s call to Congress here.

In addition to FHA Secure and Hope Now, Bush and Paulson announced a 5 year freeze on mortgage interest rates for qualified subprime borrowers:

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:

1. There are those who can afford their adjusted interest rate; these homeowners need no assistance.
2. 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.
3. Homeowners who might choose to refinance their mortgage – putting them in a sustainable mortgage while keeping investors whole.
4. 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.

Here are some credit score/loan-to-value figures I just received from a subprime lender for "full doc" mortgages:

• 90% – 580 Mid Score
• 85% – 540 Mid Score
• 80% – 520 Mid Score

The rates were not provided but I can assure they would not be attractive.  We’re probably talking double digits for a 3 year balloon with a prepayment penalty.   I strongly recommend using FHA over this type of financing.  (FHA is not credit score driven; you do need to have a good credit history over the past year). 

If you cannot qualify for FHA, then I encourage you to work with a Mortgage Professional to develop a plan to get on track for buying a home or refinancing.

The other day, FOX news contacted me after reading one of my post wanting to interview some of my successful borrowers who once had a subprime mortgage.  You wouldn’t know this from watching the news: a majority of subprime mortgages are performing well.   It’s a minority that are not.   

I was eager to help tell this story and sent an email out to a handful of my clients who once had subprime mortgages letting them know about this opportunity.   No one responded.   It made me wonder if they are embarrassed they once used "subprime financing"?   With how it’s getting a big black eye, I guess I could understand how they feel.    It’s too bad that more of the "good news" about this type of financing is not making the headlines.

The fact is, most of my clients who had subprime/alt-a mortgages are doing very well.   They did what you’re suppose to do if you have a subprime mortgage:

1. Work on improving what ever situation caused them not to have a "prime" mortgage (employment, credit, assets, etc.).
2. Prepared themselves for when their fixed period and prepayment penalty is over so they can refinance into a "prime" mortgage.  They had an "exit strategy".

Here are a few examples:

Single mom who’s self employed for one year but coming from the same line of work for five years with excellent credit.   She had a track record of solid income however, conforming guidelines require two years of tax returns (for full doc) or two years of business licenses (stated/NIV).   We provided a 30 year fixed mortgage using 6 months bank statements to document her income.   She recently sold that home and is now in her next home which we were able to go "conforming" using the proceeds from her first home for the down payment.

Wife marries a "project" husband (her loving terms, not mine) where his past credit is a mess.  Her credit is fine but he’s the primary wage earner.   They were actually my first subprime loans.   At that time, if you had a mid credit score of 600 or better, you could do zero down.   They barely squeaked in.  However, they did what subprime buyers are suppose to do:  they worked on cleaning up their credit over the two year time of their mortgage had a fixed rate.  They changed their spending habits and were responsible home owners.    They since refinanced after their two year prepayment penalty was up.    Having a mortgage has improved their credit score (as well as working on their credit) and they have benefited from the appreciation that the Pacific Northwest has offered them.

Young couple with three children living with the in-laws.  Money was a little tight as far as the down payment was concerned.  They had decent income and credit that was not quite established yet.   They believed in not having credit cards.   They were able to purchase their first home and move out of the folks house (a good move for everyone, I’m sure!) and later refinanced with higher credit scores and equity they gained by the time their purchase money mortgage was about to adjust.

Home buyers who used subprime mortgages to purchase their home, who had good advice from a qualified Mortgage Professional and who followed that advice, should not be ashamed to be associated with a subprime or alt-a mortgage loan.   They did what you’re suppose to do, use it as band-aid financing.

Home owners who have a subprime mortgage and did not change their habits are probably going to be hurt in this market.   If you currently have a subprime mortgage with an ARM or prepayment penalty adjusting within the next 18 months, please contact your Mortgage Professional as soon as possible so you can start working on your credit.

If you’re part of the first group, be proud!  You improved your credit, manage your debts and spending patterns and became a responsible home owner.   

I hope you’ll enjoy reading an earlier post of mine that I featured at Rain City Guide.  This article was originally written by me on February 13, 2007.   Recently FOX News contacted me about it wanting to speak with some of my successful clients who were once considered "subprime".   It’s too bad I had a real short notice and could not help them out.   The "successful subprime" borrowers outweigh the others by far.  Without further ado…

There’s No Love for the Subprime Borrower

It’s all over the news, we’re hearing about major subprime lenders having to restate their losses and every day, lenders are coming into my office to inform us of changes to their guidelines.   This is all good, right?    It will be tougher to provide loans for home buyers who maybe should be spending more time to learn about budgeting and using their credit cards.    What about the people who are all ready in these programs?

First, allow me to explain the basic dynamics of these loans.  Many of these mortgages are zero down, 80/20s (80% of the loan to value for the first mortgage/20% of the value for the second mortgage).   The first mortgage is typically offers a fixed rate for 2-3 years with a prepayment penalty (the standard is six months interest) that matches the fixed rate period.   In addition, the mortgages may be interest only or amortized at 30, 40 or 50 years.    The rates on these mortgages are completely dependent on credit score.

When I meet with Mr. and Mrs. Subprime, I advise them of their options of buying now using this type of subprime mortgage or that they can work on their credit, job history, etc. and buy later with a better mortgage program.   Because there are no guarantee of what rates will be (or maybe because they know there’s not guaranteed they’ll clean up their act) and because they want to buy a house now, they often opt for the subprime mortgage.   Once this happens, I heavily stress (or Jillayne would say, I lecture —which I’m sure I do) to Mr. and Mrs. Subprime that they have 2-3 years to change their spending habits because once their fixed period rate is over, their mortgage is going to adjust and do so big time.    I let them know that I want them to be in the best position for a refinance into permanent financing (or to have a better mortgage should they decide to sell the home assuming they have any equity) and that the subprime mortgage they are using to obtain their home is temporary financing. 

Many of my clients in these mortgages have done very well and I’m proud of them.   They have taken the responsibility of owning a home and having a mortgage to heart.  I’m able to restructure the original mortgage and improve their situation greatly.   The concern is for Mr. and Mrs. Subprime who just didn’t get the hang of it.   They continued to charge up their credit cards, they bought or leased a new car to go in their new driveway and maybe a new TV, too.   They’ve been sliding ever since the holidays and are now having a tough time paying their mortgages on time.   Maybe they just have one mortgage late.   Their credit is rough at best.   Their fixed period (and prepayment penalty) is over and now they really need to refinance fast because their mortgage has adjusted for the first time—their rate is now 2% higher.  Their situation has gone from bad to worse.    With all the tightening in the subprime market, even if their credit scores and scenarios are the same as when they bought, there may not be a program for them to refinance out of now.   They will be forced to sell (hopefully they have enough equity to pay commissions and other closing costs) or to somehow manage to choke down their increased payments.

I guess this post is a plea of sorts.  If you currently have a subprime loan (especially the type I described) please contact your Mortgage Planner to have your credit reviewed to make sure you’re on the right track to be able to refinance (or have a better loan for when you sell) when the time is due.   Do not assume there will be a program for you if you have not made significant changes to your spending and use of credit cards.   If you’re a real estate agent or loan originator, check in on your subprime clients to let them know of the changes in the industry…see if they need guidance to stay or get on track so they don’t wind up stuck with a higher mortgage payment, being forced to sell or foreclosure.