I firmly believe that we must live within our means. I hate paying for the mistakes of others. I think the loan companies made it too easy to get loans and I think a lot of unwise people took advantage of the situation. It's created a mess. Will the mortgage rate freeze solve the situation? Is it only delaying the inevitable? Good question. People a lot smarter than me are arguing back and forth.
However, I have read a lot of comments here and in the press that use inflammatory words like "bailout" and "handout" which get people's panties in a bunch (a technique perfected by a news media that thrives on the sensational) but may not paint an entirely accurate picture. We have a nation where too many people get their news from Jay Leno's monologue and then go off half-cocked. A mob mentality approach to economics doesn't work very well. We usually end up lynching the wrong people.
It's always best to get the facts first and then make a calculated evaluation based on the truth. I posted the link to an LA Times article earlier in this thread that answers some questions about the freeze and explains things in layman's terms. Here is the article:
Saturday, December 08, 2007
The Lowdown On New Mortgage Rate Freeze
Kathy M. Kristoff - LOS ANGELES TIMES
The U.S. Treasury and a consortium of lenders and investors Thursday announced a plan to bail out some subprime borrowers. Who qualifies for the relief, and what type of help should they expect? Here are some answers.
Question: What happened?
Answer: In an effort to avoid a projected tidal wave of foreclosures as 1.8 million subprime mortgages reset to higher interest rates over the next two years, regulators and industry came together to work out an industry-wide plan to temporarily freeze the interest rates on about one-third of these loans.
Q: Why are only a third of the loans subject to a rate freeze?
A: The consortium that negotiated the deal believes that about 600,000 borrowers can refinance without trouble and another 600,000 can't make their payments even at current rates, so they're likely to need individual help if they're going to avoid foreclosure. The remaining segment qualifies for the rate-freeze plan.
Q: What does the plan do?
A: It freezes the borrower's mortgage rate at its current level for five years. After that, the borrower would need to get a new loan or pay at the higher rate, as originally contracted.
Q: Why five years?
A: Promoters of the plan believe that period will give borrowers time to build credit and equity, and thus be in a better position to refinance. It also gives the real estate market time to recover, so, presumably borrowers who want to refinance will not get rejected for having too little equity in their homes.
Q: Who qualifies for the rate freeze?
A: To qualify, the residence must be owner-occupied. The borrower must be no more than 30 days late on their mortgage payments and have a FICO credit score of 660 or less. The loan must have been originated between January 2005 and July 2007 and have an initial reset date between January 2008 and July 2010. The borrower must have less than 3 percent equity in the home.
Q: What if I have a better credit score or more equity in my home?
A: You probably don't qualify because lenders believe you can refinance. Those who can qualify for a new loan, either through a private lender or the Federal Housing Administration, are expected to do so.
Q: If I meet all the criteria, what do I have to do to get the rate freeze?
A: Call your lender. Lenders are attempting to identify customers who qualify and proactively contact them. But, they urge borrowers to call because not all the necessary information is in their files.
Q: Can my lender refuse to freeze my rate, if I qualify under this plan?
A: Yes. This is an industry initiative, not a law. Participation is recommended but not mandatory. If your lender is not participating, your best option might be to try to refinance your loan.
Q: I've been paying interest only during the teaser period. Does my payment freeze too, or do I have to start paying principal now?
A: The industry-wide plan is silent on this issue, which means its likely to be decided on a case-by-case basis.
Q: Can you explain how the numbers work out on a real loan?
A: Naturally, the details vary by loan. However, Jeff Lazerson, president of Mortgage Grader, said the typical subprime loan was made at a teaser rate of about 5.99 percent. Reset rates would be based on an index, such as the London Interbank Offered Rate (which Thursday was at 4.423 percent), plus a margin of anywhere from 4 to 8 percentage points. For purposes of example, Lazerson figures this loan would have a 5.99 percentage point margin, bringing the total rate to 10.413 percent.
On a $100,000 loan, this borrower would currently be paying $499.16, if he were paying interest only. If he must pay both principal and interest, he would now be paying $598.90.
If this borrower could not qualify for the rate freeze, and his rate reset Thursday, his monthly payment would jump to $908.24, paying principle and interest, Lazerson added.
Q: What about people who have to refinance? What are they facing in terms of rates?
A: The good news is that rates have declined sharply in recent months. So, a borrower could get a 30-year fixed FHA loan at 5.875 percent Thursday, said Lazerson. However, the borrower would have to pay closing costs and mortgage insurance. FHA mortgage insurance comes in two parts -- a 1.5 percent fee paid up-front and monthly mortgage insurance payments of 0.5 percent of the loan amount.
Lazerson figures that combination of closing costs and up-front FHA insurance premiums would run 3.5 percent and be added to the balance of the loan. So, our hypothetical borrower would now have a $103,500 loan. His monthly payment would work out to $612.24 in principal and interest, plus $43.12 in mortgage insurance payments. Total: $653.36. That does not include impounds for taxes and property insurance, however.
Q: I have a prepayment penalty on my current loan, which is why I haven't refinanced. Will lenders forgive those penalties under this plan?
A: Lenders are being encouraged to waive prepayment penalties, or stall refinances until they expire, but they are not compelled to. Lenders will decide on a case-by-case basis.
Q: How do I find out if I qualify for a rate freeze or some other help?
A: Call your lender. "If I were a borrower in this situation, I would call early and often because the squeaky wheel gets attention and lenders are going to be overwhelmed by the volume of this," Lazerson said.
