This Sunday, 60 Minutes will run a story where Leslie Stahl talks with Alan Greenspan about how subprime lending abuses contributed to the current mortgage meltdown. 

Greenspan’s critics claim that while he was Chairman of the Federal Reserve, the Fed made mistakes by lowering interest rates between 2001 and 2004 — a claim that Greenspan still disputes.   According to Greenspan, he was aware that there were questionable subprime lending tactics that gave loans to homebuyers with low teaser rates and explosive adjustment caps.  What he says “he just didn’t get” was how these loans would impact the overall economy down the road.

“While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late.  I really didn’t get it until very late in 2005 or 2006.”

This is perhaps the most revered economist of our time and he says that he “just didn’t get it”?

Imagine how some people feel who are currently in a 2/28 loan – a popular subprime loan between 200o and 2006 with explosive adjustable features.  The loan is fixed for 2 years and then can adjust after that.  This loan is so dangerous, many states have now made it illegal for lenders to sell. 

What about the millions of people who have this 2/28 predatory loan?

It depends.

Largely, it depends on the individual person who has the loan and how well that individual has kept up his or her personal financial hygiene.

There are generally 3 groups that you can put people in who currently have a subprime loan.

1. The people who can qualify for a “regular loan”

2. The people who can qualify for a “government” loan

3. The people who can’t qualify for any kind of loan — except for a slight few of them who can *maybe* qualify for another subprime loan

People who can qualify for a “regular loan”: 

If you have a subprime loan, have a good job and you have been making your mortgage payment, your car payment and your credit card payments on time, you may be able to qualify for a “regular” mortgage that is often referred to as a “conventional” mortgage by mortgage professionals.    The main reason is that chances are if you have kept up with your bills, your FICO score has possibly gone up to the point where you can qualify for a “regular” loan.  If your FICO score is north of 680, this is a good indicator that you may be able to get rid of your subprime loan and into a “regular” loan.

Conventional mortgages generally don’t have prepay penalties (a common feature of subprime loans), have reasonable adjustment caps (the maximum allowable adjustment per period and total) for adjustable-rate loans, and are offered to people who have good credit.  Conventional mortgages come in all types (adjustable, fixed, etc.), so make sure you are working with someone who understands the differences and can explain what the differences are.

People who can qualify for a “government loan”:

If you have a subprime loan and you have made your mortgage payments on time, but been late on a few car payments, credit card payments or other types of credit-reporting payments, chances are that you don’t have a good enough credit score to qualify for a Conventional mortgage, but could possibly qualify for a FHA or VA loan.

The best option for many is the newly-announced FHASecure program.  It is specifically designed for people in this boat.  To see the qualification guidelines, click here.

People who can’t qualify for any kind of loan:

If you have a subprime loan and you have NOT been making your mortgage payments on time or any other kinds of payments on time, you may need to seek foreclosure help.  Make sure that when looking for help, first see the website set up by the US Government to help homeowners here or here for a list of HUD-approved counseling agencies. 

With the number of financing options dwindling each day and lenders pulling programs where people can use “stated income” or “no doc” loans, very few people in this category who have not taken their personal financial hygiene seriously will be able to qualify for a subprime loan.  IF, however, they manage to get another subprime loan, the absolute best advice anyone could give to help them in the future…

Make your payments.

It’s really that simple.  You pay, you stay.

Recently, Federal Reserve Chairman Ben Bernanke gave a speech in Jackson Hole, Wyoming. 

He had some interesting remarks about the history of the american housing market and noted that “When Franklin Roosevelt took office in 1993, almost 10 percent of all homes were in foreclosure (Green and Wachter, 2005), construction employment had fallen by half from its late 1920’s peak, and a banking system near collapse was providing little new credit.”

Does this sound familiar? 

He goes on to say “in 1934, his administration oversaw the creation of the Federal Housing Administration (FHA).  By providing a federally backed insurance system for mortgage lenders, the FHA was designed to encourage lenders to offer mortgages on more attractive terms.   Thi9s intervention appears to have worked in that, by the 1950’s, most new mortgages were for thirty years at fixed rates, and down payment requirements had fallen to about 20 percent.”

Bernanke says in another section in his speech “…It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”

Now think about the new FHASecure initiative — it is designed to help homeowners, not banks.  It is not a bailout for financial institutions for mistakes they made have made when setting risk policies.  It is designed to help the American Homeowner who is a responsible borrower, but was placed in a bad loan and most likely didn’t understand the complete picture of the risks associated with the loan.

So if you are a good borrower that has somehow gotten a bad loan, the FHASecure program is a great way to fix it.

Today, more details were released about the new FHASecure program.

HUD issued Mortgagee Letter 2007-11 outlining the program that was announced by President Bush last week.

Highlights include:

Maximum loan-to-value is 97.15 on properties values at more than $125,000.

Mortgage insurance premiums are not considered in the LTV calculation.

Purchase money second liens, escrow arrears, closing costs, prepaid items, discount points, late payments that happened after a payment reset, prepayment penalties and late charges can be in cluded and rolled into the new mortgage.

If the borrower does not qualify under the TOTAL Mortgage Scorecard, the maximum debt ratio of 43 percent applies — or — provide three things:

1. compensating factors

2. proof that the mortgage payment was not 30 days late during the 6 months before the reset

3. provide a letter of explanation stating that the borrowers couldn’t make their payment due to the reset.

The letter also stated that appraisers will be required to provide an analysis of market conditions and explain whether the property is in a declining market.

More to come!

The official announcement/press release from FHA following George W. Bush’s speech where he elaborated on the need for *something* to be done to help many Americans avoid foreclosure.