April 3, 2008 — Vol. 43, No. 34
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Subprime mortgages:
The time to act is now

Communities are grappling with souring subprime mortgages and a jump in foreclosures. Many people took on subprime loans assuming home prices would keep rising and refinancing would be easy. Neither proved true.

The situation won’t be easy to solve. However, one thing is clear: The time to act is now.
Worried borrowers should contact their loan servicer about a possible payment adjustment, consult a housing counseling agency about their options or approach a responsible lender about refinancing.

One refinance option is the Mortgage Relief Fund (www.mortgagerelieffund.com). Five large banks joined forces to set up this program to reach out to borrowers with high-rate loans. The banks can help borrowers explore refinancing into a more affordable loan — maybe a Federal Housing Authority (FHA) loan, a state-guaranteed loan or a conventional loan.

To qualify, borrowers’ incomes must be verifiable and sufficient to support the payments. The borrower must have a history of generally making timely payments.

For borrowers who qualify, the savings can be substantial — hundreds of dollars a month. For example, if the interest rate on a new FHA mortgage is 6 percent and the initial rate on a subprime mortgage was 8 percent, the monthly payment on a $200,000 loan would be about $268 less, for a yearly savings of over $3,200 (and more, had the original loan reset higher).

We know refinancing is not feasible for everyone. But even so, action now is important. Homeowners in dire situations should strive to make contact with the company servicing their loan. Borrowers can also consult the Homeownership Preservation Foundation hotline (888-995-HOPE).

For the good of our neighbors and our economy, I believe it is in everyone’s interest to explore solutions to this crisis like the Mortgage Relief Fund. For borrowers in subprime loans, as well as for lenders and public officials, a variety of steps are needed — and the time to act is now.

Eric Rosengren
President and CEO
Federal Reserve Bank of Boston

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