Lenders Offer Plan to Head Off Foreclosures

The Bush administration has prodded the mortgage industry into delaying foreclosure proceedings for 30 days for an unspecified (but sure to be small) number of homeowners. They are calling it Project Lifeline. Cruelly, neglectfully inadequate? Not a solution to anything.

Does anyone else think it's weird that Hope Now's Web site looks so ghetto? This little site is the Bush administration's solution to the mortgage crisis? It looks like somebody made it in their basement.

How did Countrywide get here?

A lot of bloggers out there are claiming or implying that Countrywide's Fast & Easy program is to blame for the mess the company is in. This program has allowed people who had their mortgages with Countrywide to refinance without an appraisal if they had good credit. And while "Fast & Sleazy" sounds catchy, the program was never available to subprime borrowers. It was Countrywide's subprime business, both retail and wholesale, that led set the tone for an industry much more concerned with loan volume than borrowers' ability to repay.

What is BoA thinking?

Why, you might ask, would Bank of America want to pay $4 billion for Countrywide, which has come to be seen as the Enron of the subprime mortgage crisis?

Simple. As the adage goes, if you were a car manufacturer, would you invest in research to build a car that can run for 100 years? Of course not, because at an affordable price, that product would destroy your business. Similarly, despite all the bellyaching in the secondary mortgage market, and despite all the foreclosures caused by unscrupulous lending over the past few years, Countrywide originated $408 billion in new mortgages last year. Why put people in fixed rate mortgages when your financial success is based on how many people you force through the refinancing process each year? Even though Countrywide is losing money now, Bank of America just can't wait to get its hands on the 93% of Countrywide's mortgage portfolio that is still being paid on time.

A 30-day late payment doesn't make foreclosure unavoidable, Mr. Paulson

Treasury Secretary Henry Paulson was out defending the Hope Now plan yesterday, saying it's designed to prevent "avoidable foreclosures."

But the Bush administration's proposed plan doesn't relax rules for anyone who has gone 30-days late on their mortgage. And as anyone who has been there knows, 30 days late is a long way from foreclosure, which usually doesn't start until a payment has gone 90 days late. And even then, there can be months of legal wrangling still ahead.

In fact, in many cases, if you have a substantial amount of equity, you may even be able to refinance after going 90 days late.

Will the Bush rate freeze apply to your adjustable-rate mortgage?

The first thing to understand about the Bush "Hope Now" rate freeze is that it's wasn't the Bush administration's idea. It was the mortgage industry's idea. John Taylor, president & CEO of the National Community Reinvestment Coalition, said, "The administration's aggressive focus on this problem should dispel once and for all the notion that the borrower is to blame. This is not a homeowner bailout, this is a bailout for failed regulatory oversight.

"Infectious greed and malfeasance by lending institutions is the overwhelming culprit, not consumer misbehavior," he said.

If your ARM expired before Jan. 1, 2008, you're not eligible for the government's relaxed qualifications for refinancing out of an ARM mortgage. If you've gone 30 days late on a payment, the program doesn't help you. And the program won't provide for anyone to get their ARM mortgage changed into a fixed rate without refinancing. That means many millions of dollars in closing costs for mortgage bankers, brokers, appraisers (though the rules may allow some to refi without an appraisal, as many banks already do) and others.

More than $140 billion worth of adjustable-rate mortgages "adjusted" upward in America in 2007 and that figure will be dwarfed in 2008. As a former loan officer it seems morose to me that the mortgage industry calls these "adjustments". An adjustment is when a mortgage-industry fatcat shifts his considerable weight in a comfy leather chair. When your mortgage interest rate leaps by several points, raising your monthly payment by several hundred dollars or more, it is not an adjustment. It can trigger a personal disaster brought on by corporate greed and virtually nonexistent government regulation.

Mortgage companies have put people in these horrible situations through institutionalized, systematic fearmongering. Actually though, a great many more homeowners qualify for good deals on refinancing than the industry would have you believe. Let's run through a hypothetical scenario. The appraised value of your home is $250,000. You have a $190,000 first mortgage that adjusted two months ago, costing you an additional $300 per month. You also have a $20,000 home equity line of credit (HELOC). You made the newly adjusted mortgage payment the first month, but due to the increase you went 30 days late on the second. A lot of people would say you've used a dangerously high percentage of your equity and you're headed toward foreclosure.

Actually though, if your median credit score is over 600, you're still very creditworthy to the surviving subprime mortgage companies, provided that you can go "full doc". If you can't meet the standard Fannie Mae guidelines for debt-to-income ratio, you're still eligible if you can prove with bank statements that your income is at least double your monthly obligations to your mortgage, car loan, credit card minimums and any other debts that appear on your credit report. You will qualify for consolidating your first mortgage and your HELOC into a 2-year ARM around 8.8% (in a development that I consider criminal, subprime lenders have largely discontinued options that would allow you to got that loan at a fixed rate for an increase to the rate of around 0.75%). A few years ago, 8.8% would have been considered a high rate, but with ARMs adjusting to 11, 12, 13% and higher, an offer in the 8-9% range it can mean the difference between refinancing and foreclosure.

Don't let anyone tell you that you're going to lose your home and there's nothing you can do about it. You will never hear me plug a particular mortgage company in this blog, but if you post a comment describing your situation and I find a program that can help you, I will let you know. Be sure to provide the following information:

--Value of your home
--mortgage rate, term (15, 30, 40 years, etc.) and monthly payment
--cost of monthly obligations that appear on your credit report, such as car loans and credit card minimums
--credit score and income for you and your spouse, if applicable

Fire away.