Subprime Rescue Plans - Who Isn't Being Helped

There are several plans around now purporting to ease the pain of subprime borrowers. The concrete plan is that announced by HUD for expanding the role of FHA.  Even HUD's estimate is that the current plan will only help a small fraction of the estimated 2 million who face foreclosure.

However, Congress is currently considering legislation that would expand the role of FHA, increasing loan limits, for example. It is too early to predict what will result when conferees in the House and Senate get together to work out differences between their bills, but it likely to expand FHA’s ability to do more loans and move well past the 80,000 homeowners that are currently the target.

The plan that has received more publicity is that proposed by Secretary of the Treasury Paulson, a voluntary plan that has nominally been agreed to by industry leaders. Discounting the effects of government influence on the process, the plan is still a market based solution.

When you read what people in power are saying, however, you get a very different take on the situation that does not correlate with what I, as a mortgage loan originator, see happening.

For example, there seems to be a virtually universal assumption that people with good credit can be helped by the mortgage lenders under current lending rules.  I think that the people making those assumptions don't have mortgage experience. There are several groups of homeowners who those folks probably think can be helped but aren't going to be.

For example, how about the guy who had good credit when he bought the home, who COULD HAVE gotten an A-paper loan but went to the wrong lender and got a toxic loan instead. Now that his Pre-Payment Penalty is up, he wants to refinance into a good loan. But if property values have dropped in his area, he might find that his loan balance is higher than the appraised value of his home. With no equity, he isn't going to get an A-paper loan today.

I also have sympathy for the guy who had credit problems, who bought a home with a subprime loan, and who then spent two years building a good credit history, AS HE WAS TOLD TO DO. He now has good credit, documentable income, good qualifying ratios, but with values dropping, he now finds himself with no equity and is shut out of the market.

We are a long way from being out of the woods on the credit problems that have been created by profligate lending. We need to minimize the effects of foreclosure on our economy. In these two groups are the very best of the homeowners who might be headed for trouble. Rather than booting them out on the street when their payment jumps, the best solution would be to start by taking care of them first, and only then start worrying about those who are fundamentally greater credit risks.