WASHINGTON – President Bush yesterday unveiled a plan with major lenders to freeze the rates on subprime mortgages that are scheduled for a major rate hike–the so-called exploding ARMs.
The White House said the plan would help as many as 1.2 million homeowners who may otherwise be forced into foreclosure over the next 18 months. Few of those mortgages are believed to be held by credit unions.
The Bush announcement came as the mortgage foreclosure rate hit a new record of 0.78% during the third quarter, according to the Mortgage Bankers Association. That surpassed the previous high of 0.65% set in the prior quarter. The delinquency ratio went to 5.59% in the third quarter, its highest since 1986.
But major obstacles to the plan remain, including its impact on the secondary mortgage market, where most of the mortgages have been sliced up and packaged as bonds that have been bought by investors, including many credit unions. Credit unions held more than $26 billion worth of mortgage backed securities at the end of the third quarter, according to NCUA.
Some borrowers who took out loans with subprime interest rates between Jan. 1, 2005, and July 2007 would be eligible for a five-year rate freeze if they face a rate reset over the next 30 months. They would have to show that they are more than 30 days late at the time the mortgage would be modified or have been more than 60 days late at any time within the previous 12 months.
The plan leaves out any borrowers who are judged capable of continuing to make mortgage payments at the higher reset rates. Many of those borrowers should be able to refinance into an affordable, fixed-rate loan.
