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Mortgage foreclosure bailout plan may help few


If you're a homeowner who has an adjustable-rate mortgage, you may already have been disappointed to discover that your situation doesn't qualify for the ARM interest-rate freeze that was announced with much fanfare last week. You're not alone.

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U.S. Treasury Secretary Henry Paulson Jr., in his statement to the press, said that "up to" 1.2 million of the 1.8 million homeowners whose subprime ARMs are due to reset in 2008 and 2009 would be "eligible for fast-tracking into consideration for affordable refinanced or modified mortgages." The 1.2 million figure comes from Hope Now, a coalition of loan servicers, lender trade associations and credit counseling organizations.

But Paulson didn't quantify how many of those 1.2 million homeowners would be expected to refinance their existing mortgage or how many could qualify for the interest rate freeze that's supposed to help them avoid foreclosure if they can't afford their mortgage payments at the reset interest rate.

How many homeowners qualify?
The question of how many homeowners could benefit is important because the plan has been put forward by the Bush administration as a "framework to help preserve communities by preventing foreclosure." If the actual number turns out to be far fewer than 1.2 million, that objective may not be achieved through this approach.

In fact, the interest rate freeze is targeted toward a relatively small group of homeowners whose situations meet very specific requirements.

Criteria considered in qualifying for rate freeze:
Loan origination date.
Date initial interest rate is scheduled to reset.
Total equity homeowners have in the property.
Homeowners' credit scores and other parameters.

The narrow requirements mean plenty of people who have subprime ARMs won't qualify, and the number who eventually do qualify could be relatively small.

Analysts' estimates of how many loans may be eligible for the interest-rate freeze fall into a broad range, from as few as 145,000, or 12 percent of the 1.2 million people the overall plan is supposed to help, to as many as 360,000, or 30 percent of that population. The lower figure comes from the Center for Responsible Lending, a nonprofit organization funded by a consortium of charitable foundations.

In a statement released after the plan was announced, the center noted that most 2/28 mortgages originated in 2005 won't qualify because the interest rate will have reset before the plan becomes effective. Some of those homeowners likely will have already fallen behind on their payments, which is another disqualification. A 2/28 ARM begins with a low interest rate for the first two years, after which the rate is reset to a level that's typically much higher.

The center also noted that payment-option ARMs might not be considered subprime loans in this context. A payment-option ARM allows the borrower to choose from among several payments each month. The minimum payment repays only some of the interest and none of the principal, which means the loan balance can increase over time and eventually the homeowner could be forced to make much bigger payments to pay off the loan.

Next: Lenders are not obligated to participate.
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