The Bush administration Thursday unveiled a plan designed to slow a wave of mortgage foreclosures. The architects of the plan say it could help 1.2 million troubled borrowers hold onto their homes.
The initiative, put together by the Treasury Department and the mortgage industry, sets detailed terms to identify homeowners who qualify for aid. Here's how it will work:
-- The plan will focus on subprime, first-lien, adjustable-rate mortgages, and particularly once-popular 2/28 and 3/27 loans.
Under such plans, mortgage rates were fixed only for the first two or three years of a 30-year loan.
-- Loans originated between Jan. 1, 2005, and July 31, 2007, whose interest rates will reset for the first time between Jan. 1, 2008, and July 31, 2010, would be eligible for a five-year interest-rate freeze.
-- Only owner-occupied homes would qualify for a rate freeze.
-- The plan is not binding on all mortgage industry players, but would stand as a set of best-practices and guiding principles.
-- Some plan provisions might be applicable to troubled prime and Alt-A loans, though not second liens.
-- Plan says target borrowers should be contacted about the program four months prior to the date their interest rates are set to be increased.
-- Borrowers must be making timely payments at present and not have missed two months of mortgage payments in the previous year to qualify for a rate freeze.
-- Borrowers eligible for rate-freeze may have a loan-to-value ratio greater than 97 percent and must be facing an interest rate spike, typically 10 percent or greater.
-- Mortgage servicers will help borrowers refinance in a way that avoids costly pre-payment penalties for abandoning the loan early.
-- The program identifies three general classes of troubled borrowers according to their ability to pay, two of which potentially would be eligible for relief:
1) Strong borrowers facing a rate-reset. They will be shepherded into conventional, fixed-rate mortgages, such as those available under the Federal Housing Administration.
2) Borrowers who may be eligible for a rate freeze. A formula comparing a borrower's current credit score with a score assessed at loan origination will help determine whether a borrower can get a "fast-track" rate freeze.
Borrowers with credit scores of less than 660 that have not increased by 10 percent or more since the origination of the mortgage will be fast-tracked for a modification.
Borrowers whose credit scores have climbed may still qualify for a freeze if they meet other tests.
3) Struggling borrowers who are deemed not able to afford even a modified loan. They would face foreclosure.