How to Evaluate Mortgage Bail-Out Programs

Many programs offer to bail you out of an impending mortgage rate increase. Do any really help?

Major considerations: Often, these programs require counseling sessions, which may take too long if you're in a loan due to reset soon. Some have special requirements, which may disqualify you. You first may have to negotiate with your lender, who may or may not help. The loan terms for which you qualify may be unattractive. Also, investment property or non-owner-occupied property may be excluded.

So where can you turn if your adjustable-rate mortgage rate is resetting to be assured of fast help?

FHASecure, the program recently announced by President George Bush, may be about the first to get borrowers, at risk of foreclosure, into a new loan fast.

As of last week, 35 FHASecure loans had been originated, and Countrywide Financial had started offering the program. Offices of First Horizon Home Loans, an affiliate of First Horizon National Corp., Memphis, were gearing up to launch FHASecure. Learn more at www.fha.gov.

FHASecure aims to get your loan payments back to around what they were before the loan rate reset, says Bill Glavin, the U.S. Housing and Urban Development's special assistant to the federal housing commissioner. The program has strict rules, which generally are the same as for a traditional Federal Housing Administration mortgage.

The chief difference: For FHASecure, you must be delinquent on your mortgage for 30 days due specifically to a rate reset. You also must have made at least six consecutive payments on time prior to the reset.

Catches: You can't use this loan to refinance an FHA loan. Much like FHA loans for low-down-payment borrowers, you generally must have 3% equity in your home. Also, loan limits vary by geographic region -- to a maximum $362,790.

Some lenders, Glavin says, may issue this type of loan even with a bankruptcy.

Nonprofit help

Can't qualify for FHASecure? The Neighborhood Assistance Corporation of America (NACA), Boston, on Oct. 1 was touting a 5.625% rate on a 30-year fixed-rate mortgage for refinances in many areas. NACA is a Boston-based nonprofit IRS 501 (c) 4 social action organization and mortgage broker.

So far, the organization -- at www.naca.com -- has $1 billion, obtained from large banks, specifically to refinance predatory loans. There are no down-payment requirements, points, closing costs, fees or credit score considerations.

To qualify, however, you must have a predatory interest rate, currently at least 10%, or the home must be in need of substantial repairs. You must have had your mortgage at least two years. It must be based where the program is available and meet specific maximum regional purchase price limits.

You can't be using loans to pay for living expenses, and all properties must have a thorough home inspection and termite inspection. If applicable, a septic inspection may be required.

The attractively priced loan requires a $50 monthly fee toward a "Membership Assistance Program," once you get the loan. That money, says Bruce Marks, CEO, funds free counseling and short-term financial assistance for up to three mortgage payments in case you can't make monthly payments. The $50 fee must be paid monthly for five to 10 years, depending upon the amount borrowed.

There also is a $20 annual fee per household to join the advocacy group once counseling actually starts. Based on a $200,000 loan, your monthly payment -- even with added NACA fees -- would be about $80 less at that program's 5.625% rate than with the going average 6.66% 30-year fixed-rate mortgage rate, according to HSH.com.

Major catch: Refinancing through NACA is not guaranteed after you apply. It's one solution that may arise from a mandated counseling session. Other potential solutions: Restructuring the loan with the lender or working out a payment plan so the borrower gets current.

"We would look to see what is the most appropriate action," Marks says.

What to watch out for

More national lenders need to step up to the plate to refinance loans on more attractive terms, says Kate Crawford, consumer protection chairwoman for the National Association of Mortgage Brokers.

When considering a refinancing program, Crawford suggests taking these steps:

• If counseling is a requirement and a loan reset imminent, get a commitment upfront on how long the counseling session will take.
• Get a good-faith estimate of all costs before you apply.
• Always make a payment on your mortgage -- even if you're behind.
• Refinance only with a fixed-rate mortgage.
• If you've already made payments, try to get a loan equal to the term remaining. However, if payment relief is critical, you may have no other option than to obtain a longer-term loan.
• Avoid prepayment penalties.
• Carefully shop different lenders for rates, points, costs and other terms. They often vary -- even on government programs.
• Avoid special programs in which monthly payments may change, based on income.