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Mortgage Teaser Freezer Plan Unveiled

The interest rate freeze proposal has just been unveiled by the Bush Administration, a plan which could help as many as 1.2 million borrowers stay in their homes.

“There is no perfect solution,” President Bush said Thursday as he announced the agreement reached among a slew of mortgage industry players. “The homeowners deserve our help. The steps I’ve outlined today are a sensible response to a serious challenge.”

Bush was quick to explain that the plan wasn’t a bailout, claiming the proposed interest rate freeze would only benefit responsible homeowners.

“We should not bail out lenders, real estate speculators or those made the reckless decision to buy a home they knew they could never afford,” Bush said after meeting with industry leaders at the White House. “But there are some responsible homeowners who could avoid foreclosure with some assistance.”

He also noted that thousands of borrowers have been sent letters about their options, and that aid would only come to those who asked for it, urging at-risk homeowners to call the new telephone hotline at 1-888-995-HOPE.

The president had originally given out the wrong phone number for the hotline, which was later corrected by White House staff.

Bush also played a bit of the blame game, saying the Democratic-controlled Congress “has not sent me a single bill to help homeowners.”

Hillary Clinton called Bush’s plan “too little, too late”, referring to the fact that it would exclude the 400,000 homeowners whose mortgage rates have or will reset in the final three months of 2007.

Fed Chief Ben Bernanke released a statement saying, “The streamlined process for refinancing and modifying sub-prime adjustable rate mortgages announced today is a welcome step in helping Americans protect their homes and communities from the consequences of unnecessary foreclosures.”

Meanwhile, the S&P said the mortgage freeze plan may lead to more downgrades on mortgage bonds because loan modifications will lead to reduced payments to investors.

Shares of the top U.S. mortgage lender, Countrywide Financial (CFC), rose $1.68, or 16.12%, to $12.10 on the news.

That said, here are the details regarding the “interest rate freeze proposal” unveiled today:

In order to qualify for an interest-rate freeze, you must have received your mortgage sometime between January 1, 2005 and July 31, 2007, and you need to be facing an interest rate reset sometime between January 1, 2008 and July 31, 2010.

If you fall within this range, you may be eligible to have your interest rate frozen for five years, though you won’t qualify if you are able to make payments at the higher adjustable rate, or if you can’t make payments at the original teaser rate.

The plan is focused on first-lien, 2/28 and 3/27 ARMs for borrowers who are no more than 30 days behind on their mortgage payment.

It only applies to owner-occupied properties, so investment property owners need not apply.

According to a source briefed on the plan, borrowers who have 3 percent or more home equity would also not be eligible for the freeze, and borrowers with credit scores below 660 will be first in line.

The plan identifies three classes of at-risk borrowers:

– Strong borrowers facing an interest-rate reset will be helped into FHA fixed-rate mortgages, and won’t be eligible for an interest rate freeze.

– Borrowers with credit scores below 660 that have not increased by 10 percent since the origination of the mortgage in question will be fast-tracked for a loan modification, though borrowers with higher scores may also qualify.

– And finally struggling borrowers who aren’t able to afford even a modified loan will end up facing foreclosure.

It looks like the proposal will only help a small group of homeowners, though others will receive assistance from individual mortgage lenders and through other government agencies like the FHA.

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