WASHINGTON — As is often the case in politics, the devil is in the details of the Bush administration's plan to help tens of thousands of Americans with adjustable-rate, sub-prime mortgages avoid falling into foreclosure.
Unveiled Thursday, the plan seeks to help 1.2 million homeowners, half of whom the administration thinks may be eligible for refinancing through the private sector or federal housing programs. The rest might be eligible for loan modifications that freeze their starter rates on adjustable-rate mortgages for five years.
Dig more deeply, however, and the plan becomes murkier. Here's why:
Q. Are loan servicers required to modify loans?
A. No. It's a voluntary effort by private-sector participants. The administration's assumption is that loan servicers who collect mortgages, and others in housing finance, will do the right thing. But that's up to the home-finance sector.
Q. What's the sector's track record?
A. This week's participants made similar pledges during two foreclosure-relief efforts earlier this year. Yet until recently, only about 1 percent of troubled sub-prime loans had been restructured. Michael Calhoun, the president of the Center for Responsible Lending, warns: "If you have one of these loans with a built-in payment shock, you should not hear this announcement and think your problem has been solved."
Q. How do I qualify for refinance or loan modification under the plan?
A. Homeowners must have at least 3 percent equity in their homes, must be current in their mortgage payments ahead of the pending loan-rate reset and can't have been 60 days or more behind on payments in the last 12 months.
Q. How do loan servicers decide if I qualify?
A. Mostly, they'll use your FICO score: your credit score as calculated by any of the three main credit-rating agencies. A FICO score determines how much lenders are willing to loan and at what interest rate. Qualifying homeowners with FICO scores below 660 will be fast-tracked into consideration.
Q. If my score's below 660, am I guaranteed a rate freeze?
A. No. This just steers you into a fast-track line and saves you from having to verify your income. Loan servicers must try to guess how much debt you've accumulated since the mortgage was issued, determine your fixed spending, then decide if you qualify for a lower reset or the freeze. This process is subjective and varies by lender.
Q. Does using a FICO-score threshold reward borrowers with more debt?
A. Rep. Barney Frank, D-Mass., thinks so. The chairman of the House Financial Services Committee said, "I just think that's a terrible idea." He thinks the plan puts responsible borrowers with higher scores at the back of the line. Loan servicers counter that a low score is a good indicator that a homeowner can't afford a reset.
Q. Will I still face a prepayment penalty when refinancing or modifying my loan?
A. Many sub-prime loans contain prepayment penalties designed to punish homeowners who try to refinance before rates reset to higher levels. Under the Bush plan, loan modifications freeze the original rate beyond the dates when prepayment penalties expire. So modified loans are free from penalties. But it's iffy for those who refinance. Private-sector participants agreed to "facilitate" the avoidance of prepayment penalties, but it's not required.
Q. If I have a second mortgage, will I still qualify?
A. Only primary loans are contemplated, but 4 in 10 sub-prime loans carry second mortgages. Before the modification on the primary loan can occur, the holder of the second mortgage must agree to subordinate his interest to the first loan. Doing so seems counterintuitive.