How the sub-prime mess relief works

It is a complex problem and strangely enough the government has come up with a rather simple method for taking care of it.  All you have to do if you are one of the thousands of motgage holders who are at risk is pass a simple set of tests that will allow you to qualify for the Fast Track Rate Freeze Plan.

Test One – Your current FICO score must be below, yes that’s right, below 660.  I know, after years of being concerned about that score not being high enough, you must now show that indeed you do, and probably did not, qualify for the loan you now hold.  The idea behind picking that score apparently is that if you are at 660 or above you could solve your problem by re-financing.  Good luck with that and caveat emptor, too.

Test Two – To obtain an expedited rate freeze, you must be “current” on your mortgage.  Here, two standards may apply: You aren’t more than 30 days behind right now and haven’t been more than 60 days late in the last 12 months or you aren’t more than 60 days late now and haven’t been more than 90 days late in the past year.  So the term “current” in this context means that you have, but barely, been keeping up somehow and that is good proof that helping you will in fact help you.

Test Three – The LTV test measures you current loan-to-value ratio, another way of saying how much equity do you have in the property.  Here again lower is better.  3% or lower and you qualify, any higher and somehow this means you are less likely to default and you might even qualify for a refinance plan.  This by the way, this constant referring to refinancing, is the elephant in the room.  This whole plan is voluntary but what is in it for the lender and the loan industry is that all of this refi action comes with a cost that presumably will be added to your new mortgage package and end up in the pocket of those very nice folks who are so willingly helping you out.

Tests Four and Five – The mortgage has to be on your permanent residence and your monthly payment must be scheduled to increase by 10% at the reset.

Pass all 5 tests and you are almost there.  The only thing left is that your mortgage servicer must also believe that you would default without the rate freeze, then you are in and supposedly safe for two more years.

So here’s my take on all this.  Sometimes you just have to bite the bullet.  Even if you have equity up to 10%, you still may be better off defaulting on the loan. 

Here’s why:  This is a wake up call for you and the real estate industry.  You haven’t been able to afford this property and if you truly look at your financial future you might never be able to qualify for it as long as two things stay constant.  One, as of now our rate of pay in the US is not keeping up with the inflation rate.  How are you doing in this regard?  Two, real estate prices are and have been based on the belief that real estate value will continue to increase by rates of up to 10% a year.  Do you really believe that it is in your best interest to continue supporting this idea?  Take the opportunity, yes, I said opportunity, that  this situation has provided and do some research.  Who knows maybe you’ll come up with a more affordable future.

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