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One of the more challenging aspects about working in
the mortgage business these days is the inability to help everyone that
deserves it. Today’s mortgage market is very unforgiving to those who
have stumbled on hard times. One of the questions I am asked by my
clients most often is can I refinance my home with bad credit?

Early
2000 through last year millions of people with poor credit took out two
and three year adjustable rate mortgages. These loans were used to
either refinance or buy their homes. These 2/28’s or 3/27’s, as they
were called, were much easier to qualify for than conventional FHA
mortgages. The Quid pro quo from the lenders was “make your payments on
time and we can refinance you into a better mortgage before this loan
begins to adjust”.

Unfortunately, by in large, that promise that
cannot be honored in today’s mortgage market. I believe that these
promises that the lenders made to refinance the borrowers into better
mortgages were well intentioned but naive. Seriously, in hindsight, how
smart was it to put borrowers with bad credit in a long-term mortgage
with the stipulation that they must make all of their payments on time
to get a better loan?

The rub is that most of the people who took
out these mortgages were unable to prove adequate income to support the
loan. These loans were called “stated income” loans. Meaning the
“borrower” would state the income they made and it was not verified. To
that note, many people with poor credit were put into mortgages they
could not afford with the promise that it would eventually their
payment would go up.

That sounds pretty silly when you say it out
loud doesn’t it? Now that there is a “new religion” in subprime
lending, lenders have almost ceased facilitating “stated income”
mortgages. That’s great, however what about the people that are still
unable to prove their income whose interest rates have jumped to 11%?
These are the people who will be the casualties in this debacle.

The
good news is that FHA announced earlier that they would now begin to
relax their guidelines with a program called FHASecure. This new
program will allow people who are currently late on their mortgage due
to it adjusting to refinance into low interest fixed rate mortgages.
The caveat, borrowers must prove enough income to qualify.

This
initiative by President Bush and the Federal Housing Authority will
help quite a few people save their homes. By in large though, most of
the people in these adjustable subprime loans will not be able to
qualify for the new FHASecure mortgages. Something else will need to be
done or defaults and foreclosures will increase.