Subprime Aid Plan to be Proposed by Treasury

For worried homeowners who have mortgages with interest rates that are about to reset to dramatically higher levels, there could be relief as soon as the Treasury Department and leaders in the mortgage industry finalize a plan to freeze their rates.

Some two million homeowners with subprime mortgages are struggling with higher mortgage payments and could face foreclosure if they are unable to keep up. These foreclosures are haunting financial markets worldwide, as many bad loans have been converted and purchased by investors as securities.

The new plan by the Treasury would spell relief for responsible homeowners who can’t afford higher interest as well as financial institutions fearing a cool-down in the markets.

Both regulatory bodies and the mortgage industry have steered efforts toward the restructuring of 30-year subprime loans whose interest rates are fixed at a low level for up to three years, only to reset at higher levels thereafter and hit borrowers’ bank accounts hard.

These loans with their adjustable rates were readily available during the last housing boom to borrowers with less-than-great credit records and few loaning options. Although the introductory rates are low, after a few years they spike to higher levels than prime borrowers with good credit experience on their loans.

To combat this problem, the Treasury’s plan would prolong the initial fixed interest rate for a for an extended period, giving borrowers additional protection so they don’t fall into foreclosure.

While the plan is in the works, however, regulators and representatives from the mortgage industry are trying to determine who should be eligible for an amnesty period on their interest rates and how long the period should last. Lenders wish to focus the initiative primarily on responsible borrowers with a documented history of making payments during the initial fixed-rate period.