The U.S. Treasury’s proposed interest rate freeze plan will likely only help three percent of subprime borrowers currently stuck in adjustable-rate mortgages, the Center for Responsible Lending said today.
Based on the nonprofit organization’s analysis of recent industry data, loan modifications will only prevent about 118,000 foreclosures among the 3.7 million subprime borrowers holding ARMs.
“The Treasury plan will be a welcome relief for those it helps, but given the magnitude of today’s economic woes, the plan won’t help nearly enough to avoid further widespread economic damage from foreclosures,” a release from the center said.
Of the loans studied, industry data revealed that for every loan modification made by a lender, 7 times as many foreclosures are initiated, and that number nearly doubled to 13 to 1 for subprime ARMs.
The group also slammed mortgage lenders for crediting themselves for executing “repayment plans” in which homeowners’ monthly mortgage payments actually rise, while terms on the loan don’t necessarily change.
And noted that lenders have no obligation to report the outcome of modifications, pointing out that Countrywide said most of its mods “involved deferring overdue interest or adding the past due amount to a loan,” not lowering mortgage rates or reducing loan balances.
“The most effective policy for significantly reducing foreclosures would be permitting court-supervised modifications of distressed mortgages—but homeowners are specifically excluded from such relief under current bankruptcy law,” said Eric Stein, senior vice president of the Center.
“Legislation to remove this barrier is now moving through both the House and the Senate. Congress has the power to prevent 600,000 homes from being lost to foreclosure, at no cost to the national Treasury,” said Stein.
“We urge Congress to pass this necessary legislation, both for homeowners and the nation’s economy.”
American Securitization Forum Proposes Changes to FHA Secure
In related news, a study circulated within the American Securitization Forum said the current FHA Secure program is positioned to help only about 44,000 subprime borrowers, or five percent of those who are more than two months behind on their payments.
The group said revised guidelines would help 607,000 subprime borrowers, or 68 percent of those who are severely delinquent, by offering the program to borrowers in fixed-rate mortgages, among other situations.
The changes would also open FHA Secure to borrowers who became delinquent for any reason and who made any six monthly payments since the loan was originated and three on-time payments after a rate adjustment.