Borrowers with damaged credit can find walking the road to homeownership exhausting. But if industry experts are right, "TRAMs" may soon be along to help.

The Track Record Adjusted Mortgage would offer a person who re-establishes good credit the chance to lower his interest rate and payments. The idea for TRAMs emerged recently in discussions among government officials and lending professionals. While such loans aren't yet available, one day they may make getting out of a "subprime" mortgage less expensive by eliminating the cost of refinancing.

Until the TRAMs arrive, however, consumers should realize that loan programs available now can slash the cost of homeownership substantially.

A mortgage that rewards good behavior
"All we're trying to do is float a concept that we think makes good policy sense," says Richard Riese, director of compliance policy for the Treasury Department's Office of Thrift Supervision. "The idea was, 'Why not have something like a mortgage product that would adjust at some point so you can take advantage of the fact you can improve your credit history?'"

Subprime lending gained widespread acceptance and attention from borrowers and traditional banks alike during the past couple of years. People who once couldn't buy homes now can borrow at higher rates to do so. Old-line lenders, on the other hand, have found they can make more money by dabbling in the sector and buying up their subprime brethren.

"Subprime is an important source of credit to a lot of people who have either no credit history or a credit history that has a blemish and may not otherwise be able to qualify for prime financing," says David Gibbons, deputy comptroller for credit risk at the Treasury Department's Office of the Comptroller of the Currency.

Subprime, but higher cost
Because subprime loans feature more risk than conventional mortgages, however, they carry much higher price tags (see table below). A so-called "B" credit borrower who walked into a lender's office on April 16 might be charged interest at 11 percent with one point on a 30-year fixed loan, for instance, while an "A" credit customer might pay interest at 7 percent. On a $100,000 mortgage, the subprime borrower would end up paying $242,836 in interest -- 74 percent more than the standard one. The monthly principal and interest payment would be $952 with the higher-rate loan, rather than $665.

Technically, nothing prevents subprime borrowers from refinancing to lower-rate conventional loans down the road if they manage to improve their credit standing. But right now, people who would like to do so face the prospect of paying thousands more in closing costs and getting an entirely new loan. And because they're making such large monthly payments, people can have a hard time saving up that kind of money.

"Many of these people have very little equity in the house and although real estate refinancing costs have gone down, they haven't disappeared," says Riese of the OTS. "For them to take advantage of their improved credit history to get into a market-rate product, they're either going to have to come up with that additional money and get over that hurdle or roll it into a refinance."

At a recent meeting of lenders, government officials and bankers, OTS Director Ellen Seidman laid out two models which TRAMs might follow. In one example, a person's rate would automatically change after he accomplished some predetermined goal. Someone who made two year's worth of on-time payments, for instance, would see the rate drop from subprime levels to whatever the conventional rate was back at the time he originally got the mortgage.

Another way: The 'tryout' rate
In the second case, a subprime homeowner would be granted an option to "try out" for a lower rate after meeting certain criteria. If a borrower paid on time for a year and took a mortgage counseling class, she might be able to exercise her right to a trial by credit scoring. If she passed, she would get the conventional rate available at that time, rather than the one available in the market when she first took out the loan. That way, she could benefit even more if interest rates declined in the interim.

"The person would not be paying closing costs as part of this move, as opposed to what exists now -- a complete refi," Riese says. "Just like we have adjustable rate mortgages ... and that costs nobody anything, here's another way."

What you can do now
So what can subprime borrowers do while they're waiting for lenders to develop these ideas into viable programs?

First off, they should realize that refinancing into a conventional loan just isn't as tough as it used to be. Some market-rate mortgages require as little as 3 percent down, and that money can come from a relative or other gift source under certain circumstances. Even borrowers with bankruptcies or foreclosures in their past can seek out new loans if they meet stringent guidelines. That's because Fannie Mae and Freddie Mac -- the two corporations that buy mortgages from lenders in order to keep the money flowing -- have relaxed the standards governing which loans they'll buy.

Secondly, experts say consumers should make sure they get noticed for improving their borrowing habits.

"Some subprime lenders don't report to credit bureaus and that's a real problem," says Gibbons of the OCC. "They don't report that borrower's improving credit history because they're afraid that some other lender will see the improvement and take that borrower away from them.

"They may be able to keep the customer and not get them qualified for better rates, which in my mind is a sort of unfair tactic for the customer," he adds. Borrowers should check their credit report at least once a year to make sure their lenders aren't shortchanging them.

Borrowers have choices
Borrowers do have some choices when it comes to making the transition from subprime to conventional loans. Countrywide Credit Industries Inc.'s Full Spectrum Lending division, for example, offers a "Credit Repair Mortgage" designed to guide people into lower-rate loans. But it still isn't as convenient or consumer-friendly as the government's suggested programs.

The credit repair mortgage is essentially a 2/28 or 3/27 loan, with the first two or three years fixed and the remaining years at a variable rate, according to Joe P. Harvey, Full Spectrum's president. Rather than get an 11 percent 30-year fixed rate subprime mortgage, a "B" borrower could get this loan with an initial rate of about 9.5 percent by paying one point.

People who improve their credit and pay their bills on time can then refinance into a traditional mortgage with Countrywide's conventional mortgage company or another lender. But someone who ended up in worse shape would be at the mercy of interest rates thereafter, and even those who refinance would have to pay normal closing and other costs associated with getting the lower-rate loan.

"What we're trying to do," Harvey says, "is to be able to take folks who've had credit challenges, through no fault of their own or sometimes their own fault, and be able to serve them -- convince them that there is a place for them."

Coming April 29

Mortgage fraud comes in many different forms, but the end result is often wrecked dreams and shattered credit for victimized consumers. By keeping informed and taking precautions, you can protect yourself.