Subprime ARM borrowers needing to refinance
The fate of homeowners holding subprime adjustable rate mortgages that have or will reset at higher rates will continue to weigh on the housing and mortgage markets in 2008.   While there is no one-size-fits-all solution for ARMs holders facing big resets, many individuals will find they do have options, including a number of refinancing alternatives.  One group of homeowners with subprime mortgages will be eligible for help under a plan that was negotiated by the the Treasury Department with loan servicers and mortgage investors.   The loans that are eligible are ARMs with fixed-rate periods of three years or less (mostly 2/28s or 3/27s), originated between January 1, 2005 and July 31, 2007, that have an initial reset date scheduled for between January 1, 2008 and July 31, 2010.  The program applies just to loans held in securitized pools (which will be most loans).  Loans held in portfolio by a financial institution are not covered by the plan.  An individual institution may choose to adopt the plan’s principals or institute a more or less liberal version for portfolio loans.  Some servicers have already instituted in-house plans. If yours contacts you about one, by all means hear them out.  Under the negotiated plan, homeowners will fall into three categories: 

(1) Those who are able to continue to make their payments as contracted.  These homeowners generally will be expected to keep their current mortgage or refinance.  Many subprime loans were made to people with good credit who fell short of meeting the standards for prime mortgages because they made a smaller downpayment, did not want to document their income or assets, or needed high debt-to-income ratios to buy the home they wanted.  Because many subprime loan borrowers do have good credit, one Federal Reserve official has estimated that more than half of homeowners with subprime ARMs should be able to refinance into a less-costly loan by taking advantage of existing programs.  In fact, many of these borrowers might now qualify for a prime mortgage having successfully met their mortgage obligations for a period of time.  A number of mortgage options should be available for these homeowners.  Because their current servicers may not offer all the available mortgage products, the homeowner may need to look outside their servicer to have access to the greatest number of choices. 

(2) Borrowers who it is determined can continue to make their payments so long as their rate stays the same.  These are homeowners who may be eligible for a “fast-track” loan modification that would keep their existing rate in place for five years following the reset.  Homeowners in category three must not be more than 30 days delinquent currently or have been more than 60 days delinquent in the last 12 months.  Any current loan that has a loan-to value exceeding 97% would be considered ineligible for refinance into any available product and, thus, fall into category 2.   Generally, category three homeowners must not be eligible for an FHA Secure refinance (see below for more on this program).  Homeowners in this category must also meet tests with respect to their FICO credit score (for instance, a FICO score under 660 that is less than 10% higher than the score when the loan was originated qualifies!).  If the FICO test is not met, then an alternate analysis will be employed.  The plan will apply only to first mortgages for borrowers who occupy the property as a primary residence andhave resets that would increase the mortgage payment by more than 10%.  What if you have an equity line or other 2nd mortgage on the home?  The guidelines say that servicers of 2nd  liens “should” agree to subordinate the loan to the new 1st trust, but they are not required to. 

(3) Those who are already behind on their payments even before their first adjustment.  Sadly, at present there is no program available to these homeowners.  Generally, they will be subject to “appropriate loss mitigation.”  They will be on their own to try to work with their servicer to try to get a loan modification, appeal for forbearance, opt for a short sale or simply succumb to foreclosure.  What about homeowners who fall outside the parameters of the plan?  For those who were current on their adjustable rate mortgage before a reset, but have since fallen behind, FHA has a new program called FHASecure that will refinance non-FHA ARMs that ARMs that have reset, even if you are now in default.   Contact a Choice Finance® loan officer for more information.
© 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Real Estate of VA, Inc., & Choice Finance®
  Alex Echeandia, Choice Finance®