Homeowners See Possible Relief

The cat is out of the bag, and it looks like there may be help for people who are facing unmanageable ARM’s.  Now *some* people with these sub-prime mortgages can get their teaser rate frozen for 5 years in order to avoid impossible payments.

The New York Times has a good article discussing the widely varying views concerning the new proposal.  Let me first give a brief description of the plan Bush announced to help bailout homeowners.  This proposal will only work for homeowners who:

• Took out their loan between January 2005 and July 2007 and whose rates are set to increase between January of 2008 and July of 2010
• Have less than 3% equity in their homes
• Are current on their payments (or no more than 60 days behind)
• Are able to handle their current lower rate, but will not be able to handle a higher payment.

Why this plan makes sense:

• An estimated 250,000-360,000 homeowners may now be able to avoid foreclosure
• It is being industry-led, not government mandated, meaning each lender can set their own criteria for approval
• Bank losses are estimated to be 40%-50% on a foreclosure, this should help reduce their red-ink margins

Why this plan doesn’t make sense:

• People deemed to be hopelessly in debt may not be qualified by their lender
• People with higher credit scores may be deemed ineligible because of their higher credit rating
• The plan is seen by many as a type of reward to people who spent beyond their means, and could encourage reckless spending
• Investors are unhappy with increased income returns being frozen
• The plan is voluntary rather than government mandated, meaning investors can choose to not participate in the program.

I’m sure there’s going to be plenty of debate for weeks to come on this plan, but until we have a better idea of how many people will be affected, it’s very hard to say how good this is for the homeowners and how bad it is for the investors.  I admit I’m a bit of a bleeding heart, and right or wrong, I think any help like this to homeowners is a positive step.

P.S.-  To Mr. George Bush, who made the lender announcement publicly in an attempt to improve his administration’s image; Get your facts right before you announce a new initiative like this!