Subprime bailouts: Chump check

NEW YORK (CNNMoney.com) -- Not everyone is happy about mortgage lenders' latest efforts to help troubled borrowers.

Take Teresa Nelson. Instead of going for an adjustable rate mortgage with its lure of low initial rates, she opted for the security of a 30-year fixed at 7.10 percent for a house she bought in Pinellas Park, Fla. in December, 2005.

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"I was well aware of what an ARM meant, and was staying far away from those snake-oil pipe-dream promises," Nelson said. "I also wasn't shopping for a short-term, big payoff investment - I was looking for my home, until I retire."

But many delinquent subprime borrowers who went for low teaser rates that shot up to unaffordable levels are now paying lower rates than Nelson as part of a new round of foreclosure prevention packages. And she doesn't like it.

For example, one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.

Nelson feels cheated and has little sympathy for people who she believes weren't as careful as she was. "Everybody was seeing dollar signs," she said, "and let their greed get the better of them. So, no. No bail-out, no assistance with my tax dollars. Not one red cent."

She's not alone. Last month, many CNNMoney.com readers expressed outrage to bailouts - whether they involved tax dollars or not - after Countrywide announced good deals for bad loans. (TalkBack: Are you a chump?)

Countrywide said it will refinance or restructure loans or reduce interest for hybrid ARM borrowers whose rates are scheduled to reset. And no one will have to pony up prepayment penalties for retiring loans early.

Countrywide then announced it will rework loans, prime and subprime alike, for any troubled borrower, adjusting payments to reflect what individuals can afford. The company will administer the program with non-profit community advocate, the Neighborhood Assistance Corporation of America (NACA). Some troubled borrowers will escape with refinanced loans as low as 5.25 percent.

Why should help be given, and possible taxpayer money spent, to home owners in trouble?

According to Steve Bailey, Countrywide's CEO of loan administration, there are good reasons, but it's a mischaracterization to say all the foreclosure prevention programs are aimed at irresponsible borrowers.

One of the biggest groups Countrywide targeted - 52,000 subprime hybrid ARM borrowers that it will offer refinanced loans - have good payment histories and low-risk profiles, according to the company.

They typically had credit problems in the past but, according to Doug Duncan, chief economist for the Mortgage Bakers Association, hybrid ARMs have traditionally been the right remedy.

ARMs work as credit-repair vehicles, enabling borrowers to rebuild credit by paying off loans for a couple of years at affordable rates. Many then qualify for prime, fixed-rate loans.

Despite the recent collapse of the subprime lending market, Bailey said, 70 percent of hybrid ARM borrowers still paid off their loans. "These loans take a beating as predatory but they saved [borrowers] millions."

But his company is also restructuring loans for delinquent borrowers, who now will pay at the initial low "teaser rates" for an extra five years for huge savings. They could have seen their payments rise by 30 percent, 50 percent or more. That's great for them, but many responsible borrowers, like Nelson, feel like chumps.

Bailey said he understands their anger but said, "That's a situation where the greater sin is letting their homes go into foreclosure. You have a vacant home in the community and drive down the property values of neighbors."

According to Bailey, before these loans are approved, the lender's, the investor's and the community's interests must all be considered. If all those are advanced, then concessions will be made.

And, the program's not designed to be easy, according to Bruce Marks, chief executive of NACA. "It's an arduous process, a sacrifice," he said. "Borrowers have to change their lifestyles, tear up credit cards, lower car payments. We're putting people through hoops. Then, they have to document their spending and make payments on time for six months before the restructurings become permanent."

Still, Scott Keegan, executive director for National Association of Mortgage Professionals, fears that public money will be spent bailing out people and there'll be taxpayer backlash.

"The majority of people I talk to are upset already," he said. "They say, 'I make my payments on time. Why do these people get bailed out?'"

He understands Countrywide's newfound flexibility. "It's self-preservation," he said, and predicts the credit crisis will worsen over the next few years. The leap in foreclosures "is not even close to what's going to happen in the next 12 months."

With some of the refinancing slack being picked up by FHA and the government sponsored enterprises like Freddie Mac, Keegan does not think the funding of these organizations will last without significant infusions of public money.

Some people will get a sweet deal, one that, in the eyes of other borrowers, they may not deserve.

As for Teresa Nelson, she understands the rationale behind bailouts but still disagrees with them.

She said, "The American taxpayer has been paying through the nose for corporate handouts for too many decades now." She does not think we should help cover the losses brought on by business decisions of big bankers or greedy consumers that thought they'd get rich in property speculation.

"Our nation is closer to a recession, and it may be just what we need to get people to tighten their belts and live within their means," she said.