Who will get relief from subprime mortgage mess

Advice for homeowners who are still paying the teaser rates on their subprime mortgages: Keep making those loan payments, and answer the phone when the lender calls.

Homeowners who follow those two rules might be able to take advantage of a plan to prevent mass foreclosures. The initiative, released Dec. 6, was dreamed up by bankers and federal regulators. With a bean-counter's tin ear for English, they call it the "Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans." It's as complicated as the name implies.

But for now, the advice is simple:

"What's most important under this protocol is to stay current on your loan," Sheila Bair, chairman of the Federal Deposit Insurance Corp., said during the White House's dog-and-pony show to announce the plan. And, she added, get on the phone to your loan servicer.

Help is coming in three ways
Subprime adjustable-rate mortgages are known as 2/28 and 3/27 ARMs. They have teaser rates for the first two or three years. After that, the rates jump, and monthly payments can rise hundreds of dollars. Subprime borrowers have flawed credit, and many of them can't handle such a large jump in monthly payments.

Almost 2 million subprime borrowers face rate reset in 2008 and 2009. Bankers and regulators worry that a wave of foreclosures will ensue. Over the summer, Bair came up with an idea to prevent foreclosures by freezing the introductory rates on subprime ARMs. Her insight was that a lot of people could afford to keep making the payments under the introductory rate but wouldn't be able to afford the payments after rates reset.

Why not extend introductory rates for those borrowers? Bair's proposal was dismissed at first as unworkable.

A few weeks ago, Treasury Secretary Henry Paulson adopted the core of Bair's idea. Industry participants suddenly seemed to take the notion seriously. Paulson gathered lenders, mortgage servicers and investors under the umbrella of a group called the Hope Now Alliance and brokered the deal that was announced Dec. 6.

Under the Paulson plan, mortgage servicers have a set of guidelines that they can use to classify subprime customers into four categories.

4 categories of 'subprimers'

• Hopeless cases who can't afford their payments under the teaser rates. • Those who can afford their mortgages even after the rates reset and the monthly payments jump. • Homeowners who can refinance into another loan, possibly one insured by the Federal Housing Administration. • People who can afford the teaser rate, but can't afford a higher rate, and who can't refinance because they owe more than the house is worth.