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Help for Subprime Borrowers

As foreclosures surge, members of Congress are putting pressure on mortgage companies to protect homeowners from high-risk loans and unscrupulous lending practices. One result is that some subprime lenders are allowing a temporary freeze on rates for borrowers, who may then be able to refinance out of high-interest loans.

Facing an avalanche of subprime mortgage defaults, some mortgage companies are offering borrowers-at least for the time being-a moratorium on interest rates. Their hope is that within this holding period, homeowners might be able to resume normal payments, refinance to cheaper loans, or sell their homes to pay off their outstanding balances. In this way, mortgage companies are optimistic that both they and their customers may avert a financial catastrophe.

Legislative freeze

Much of the momentum behind decisions such as rate freezes is coming directly or indirectly from legislators who are conducting investigations into recent mortgage lending practices. Congressional leaders are pushing for tighter laws to protect homeowners from loans that can suddenly spin out of control when interest rates rise unexpectedly, as they've done within the past few years.

The state of Massachusetts, for example, has enacted a temporary halt on foreclosures against homeowners who have filed complaints with state banking regulators, to give citizens time to argue their cases. If more states take similar steps, it will place a huge obstacle in the path of lenders trying to recoup their losses. As a result, mortgage companies are trying to police themselves to avoid mandatory government regulation. Lenders are already tightening their purse strings and making it more difficult to qualify for a mortgage, especially for potential borrowers with bad credit.

Winning the tug-'o'war

Meanwhile, borrowers find themselves in the middle of a tug-'o-war between regulators and mortgage companies, hoping that the pendulum will swing in their favor to help them dodge a bullet and hold on to their homes. If you have a subprime loan, and your rate is poised to adjust upward, you may be able to work with your lender to revise the terms of the mortgage. Defaults are very bad for business, so mortgage companies are often highly motivated and willing to bend over backwards to help you avoid foreclosure.

Refinance to save the day

Even if you can't cut a deal with your lender for revised mortgage terms, you may still be able to refinance out of the loan into something you can more comfortably handle. Under Fannie Mae's HomeStay initiative, for instance, borrowers struggling with their current loans can often qualify for better loan terms.

Refinancing is contingent upon having a healthy credit history and track record, so it may not work for everyone. But if you qualify, it can be one way to get out of a sea of debt and back to dry land.

By:Tom Kerr

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