President Bush's Mortgage Plan: Who Qualifies?

The good news: The plan will reach far more struggling homeowners than housing counselors have been able to help so far (they've been negotiating with mortgage servicers on a case-by-case basis). That's thanks to the specific guidelines established by the American Securitization Forum, the organization that represents mortgage issuers, servicers and investors. Servicers will now be able to quickly determine which homeowners qualify for help and the type of help they will receive, based on specific factors like the type and size of their mortgage, their payment history and FICO scores.

An estimated 1.2 million homeowners could qualify for help under this plan, according to the Homeownership Preservation Foundation, which negotiates on behalf of consumers. Some will be able to refinance into loans with better terms, while others will qualify for a much quicker five-year freeze on their current mortgage rates.

However, many homeowners — particularly those already in trouble — will not be eligible for any help at all. Here are the criteria homeowners have to meet to qualify and the solutions available to them.

Your loan must have originated between Jan. 1, 2005, and July 31, 2007. More importantly, your initial reset must occur between Jan. 1, 2008, and July 31, 2010. This leaves out the hundreds of thousands of homeowners who have already faced a rate reset this year, including those who took out 2/28 loans in 2005.

And, if you're already behind on your loan, you won't be eligible for any of the "fast" solutions outlined in the plan. Likewise, you'll be disqualified if your home isn't a primary residence. (This includes investors who are currently renting out their properties. When a landlord loses his home to foreclosure, meanwhile, the tenants living there typically face almost immediate eviction. For more on this, click here.)

The much-talked-about five-year rate freeze, on the other hand, will be available to anyone who doesn't qualify for a refinance, particularly folks with low credit scores and little or no equity in their homes. (Whether it will be effective in the long run is another question. Click here for more on that issue.)

To qualify for a rate freeze, the loan-to-value ratio on your home must be 97% or higher, which means you must have no more than 3% equity in your home. (This is the loan-to-value ratio during the origination of the loan, so the recent decline in housing values doesn't come into play here.) Then, mortgage servicers will apply a newly-created FICO test. Basically, if your FICO score is 660 or below (scores range between 300 and 850), and it hasn't increased by at least 10% or more since your score at the time you took out the mortgage, you pass the test and qualify for a five-year freeze.

If your score is above 660, or has improved by 10% or more since loan origination, the servicer will look into your financial situation more closely to determine if you qualify. They might consider your income, current debt levels, and any other factors the servicer may deem necessary. This, of course, will take time since such cases will need to be reviewed individually.

A loan-freeze might be a quick and easy solution, but even with a wholesale approach to determining who qualifies, mortgage servicers are likely to be overwhelmed with requests. "The merit of this proposal is it will allow servicers to process a big chunk of loans and get them out of the way on a wholesale basis," says Jack Guttentag, professor of finance emeritus at the Wharton School of Business who also runs a mortgage information site for consumers at mtgprofessor.com.

But that's little consolation to folks who don't pass the FICO test and will have to go through the individual review process. When it comes to loan modifications, "right now, servicers are moving at a snail's pace," says Guy Cecala, publisher of Inside Mortgage Finance, an industry trade publication. "It's labor-intensive and that's going to be an issue going forward." On average, it currently takes two months to do a loan modification.

Meanwhile, servicers are by no means obliged to freeze interest rates or modify loans. The guidelines issued by the American Securitization Forum are just that — guidelines — and there's no guarantee that all servicers will jump on board. The Homeownership Preservation Foundation now represents 84% of all mortgage servicers, but that still leaves a significant number of homeowners out there who may not receive any help.

Servicers are concerned that they may face lawsuits from investors, says John Rao, staff attorney with the National Consumer Law Center. Servicers, after all, are obliged to act in the interest of the investors who own the loans. But not all investors have equal interest in the mortgage trusts, so when a loan doesn't perform as expected, some might get paid while others won't. "These investors might sue the servicer claiming that modification is not in their interest," Rao says. "Even though Secretary Paulson and President Bush have given their stamp of approval, I wonder if it will be enough to get the servicers to ultimately all agree to do this."

The guidelines issued by ASF today include a disclaimer that all proposed solutions are "subject to any specific provisions of securitization operative documents that may limit modifications, such as a provision limiting the total number of modified loans to a percentage of the securitized pool." In layman's terms, that means if the agreement between the servicer and investors says they can modify no more than a certain percentage of all loans, the servicer must comply. According to a recent Credit Suisse survey of mortgage servicers, one-third of agreements had a cap on the number of loan modifications permissible in the pool, typically no more than 5%.

But perhaps the biggest drawback to this plan is that it only provides temporary relief. Granted, five years might be enough time for most people to improve their credit, increase their income and get back on their feet. Those who don't? "These folks will be facing the same problem in a couple of years," Rao says.