Subprime loan bailout programs

It is clear that the increase in foreclosures caused by negative amortization loans and short term fixed teaser rates has prompted some state governments to get involved by offering a bailout program. In addition to regulatory pressure on lenders the state of Maryland has stepped up to provide a program to help borrowers get out of these loans.

The program, called Lifeline, provides borrowers with a list of approved lenders that will refinance the loans into a long term fixed rate loan. There are limits to household income and loan amounts to qualify but this is a step in the right direction. The state program offers 30 year fixed rates of 6.5% which is well below what many subprime borrowers would qualify for.

Ohio has a similar program called the “Opportunity Loan”. Other states that plan to jump on the band wagon soon are Rhode Island, Massachusetts and Virginia.

The drawback is that these loans will tap into funds earmarked for other state projects and if the foreclosure problem becomes to great this could be an issue.

Many borrowers’ current loans have prepayment penalties and while the state has greater leverage to force lenders to comply with the program there is no assurance these penalties won’t be enforced.

The cost of the Lifeline program for borrowers is 2 points which can be factored into the loan.

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