Depending on whose opinion you are reading, the Paulson/Bush plan for mortgage rate freeze is either an overly generous mortgage bailout or a woefully inadequate attempt to help borrowers misled into bad loans. Opinions are all over the map.
But only a few eyebrows have been raised by the requirement that, to be elgible, some borrowers must commit “credit score suicide,” as credit expert Emily Davidson warns at Creditbloggers.
Because the rate freeze is only available to consumers with credit scores of 660 or below, some consumers may have no choice but to damage their credit in order to qualify. Which would you do: hurt your credit a bit in order to get a break or go into foreclosure (which would hurt your credit more significantly?) Hmmmm….not a lof choice there.
The goal of the credit score cut-off is to allow only “subprime” –supposedly the most abused borrowers — to qualify. However, many studies have shown that as many as a third of borrowers who got subprime loans in the past year could have qualified for Alt-A or even conventional loans. The problem is those borrowers, who are the most likely to be able to repay, would not qualify for the freeze unless they lower their scores.
I know the experts will say those borrowers should refinance, and that’s may be a legitimate answer. I definitely recommend they use the mortgage search engine to find out what programs are available.
However, they may find nothing is available if
a. their home value has fallen and they didn’t start out with a hefty downpayment
b. they fell into subprime due to lack of income documentation or other factors besides their scores (and we’ve seen what’s happened to “stated” income loans), or
c. they can’t refinance due to a significant tightening of lending standards.
Applying a cut-off score to the freeze program is treading on dangerous ground. A better solution would be to require a documentation that they can afford their loan at the current rate, but can’t qualify for a refinance, and then allow them to freeze the rate for a period of time.
And what if homeowners do damage their credit scores to qualify? Will they be able to qualify to refinance in 3-5 years?
There are no easy answers here, but asking homeowners to ruin their credit to save their home is as bad a “solution” as the loans that got them into trouble in the first place.
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