Solutions for the Homeowner with a Sub-Prime Loan -When Will the Cavalry Arrive?

In California and other high-priced areas, many home buyers purchased their homes with sub-prime loans.  This group of loans offered a lower payment structure for two to three years with the hopes of refinancing loan into a more permanent loan structure.  Most homebuyers that purchased up until 2004 were successful in doing a refinance with the large appreciation that occurred during that time period.  For the homeowner who purchased after that period it has been a totally different scenario.  Many have found themselves stuck with a loan that they could not refinance due to declining values and loan products that were no longer available.

The average consumer used an 80% first trust deed and 20% second trust deed.  The first had an interest rate in the 6% range, and when the two or three year term was up the sub-prime loan would increase from the 6% range to close to 9% and required principal to be paid.  Just the interest on a $400,000 loan would amount to a $1000 per month increase without including the principle, which would add approximately another $400 per month to the payment.  This type of increases would be nearly impossible for most homeowners to pay.

Many articles have been written for homeowners with these exploding adjustable-rate mortgages advising them to contact their lender and attempt to renegotiate for an extension of the old payment for one or two more years.  Based on a limited but valid number of situations the banks have not shown much interest in renegotiating the term of the payments.  In this situation a homeowner is faced with a foreclosure and walking away from their home or placing their home on the market and attempting to do a short sale, which is when the seller asks the bank to accept less than a full pay off on the mortgage.

In order to provide some relief to the sub-prime borrower, the Department of Housing and Urban Development gave lenders the go ahead to start refinancing delinquent sub-prime homeowners into Federal Housing Administration loans.  These are traditional 30 year fixed loans.  This emergency program is to help this group of homeowners avoid foreclosure.  This is an attempt in the Bush administration to mitigate some of the problems caused by the sub-prime meltdown.  Under the FHA Secure program borrowers who were current on their mortgage payments up until the time of their arm adjustment would qualify for this program, even if they are currently behind on their payments.  This FHA program is also a great help for homeowners in declining here is a value have a second lien on their home above and beyond the appraisal value.  HUD expects to refinance 60,000 homes under this program.  This program is temporary and will expire by the end of 2008.

This is a step in the right direction for some trouble homeowners to save their home, but they will still be facing large payment increases.  If they receive the same interest-rate as the original note the payment still increases with the addition of the principal and mortgage insurance.  On a $400,000 mortgage down an additional $400 per month, still a problem for the average homeowner.  This is only a Band-Aid for the sub-prime problem.  A real solution to the sub-prime meltdown would be a federal freeze on all adjustments of sub-prime adjustable-rate mortgage products for two years.  This would give the troubled home-owners time to find better solutions or achieve the appreciation necessary to refinance into less aggressive loans.