No free ride for subprimers

NEW YORK (Money) -- If you think responsible borrowers are getting the short end of the stick with President Bush's mortgage freeze - don't worry - subprime borrowers aren't getting off scot-free.

"When do my husband and I get a break? We were responsible and bought a house that we could afford," a Los Angeles reader named Ann wrote among the nearly 500 comments on CNNMoney.com's TalkBack blog. "Bitter, you better believe it!"

The thousands of subprime borrowers eligible for the rate freeze are still being "punished" for reckless behavior in the past - just not by as much as they would if their adjustable-rate mortgages were allowed to move to unaffordable levels.

"The fact is, subprime borrowers had higher rates to begin with and will still pay more," said Steve Habetz, president of Threshold Mortgage, a Connecticut-based mortgage broker.

Estimates vary on how many borrowers would be eligible for the freeze, from around 150,000 to 240,000. Some 2 million subprime borrowers have ARMs that will reset to higher levels in 2008 and 2009.

To qualify, those borrowers have to be current on their loans, and lenders have to determine that the owner can't refinance or afford an adjustment. The freeze will only affect those whose payments would increase by more than 10 percent with an adjustment.

But even those who qualify aren't on easy street. Consider two people who bought similar homes in 2005 with $200,000 loans. One had worked hard and made sacrifices to ensure a good credit score to lock down a prime rate. The other was a free-spender who had racked up debt and could get only a subprime loan.

The prime borrower could have gotten a 30-year fixed-rate mortgage at 6 percent.

The subprime borrower might have qualified for an introductory rate of 8 percent that was scheduled to be fixed for three years before jumping in 2008 to 12 percent.

If the subprime borrower's rate were frozen, his payments would still be about $270 higher than that of the prime borrower. But the freeze would prevent about a $560 increase in the subprime borrower's payments.

The key is that most subprime borrower's introductory rates were higher than the fixed rates given to prime borrowers, said Keith Gumbinger, vice president of HSH Associates, a mortgage information provider.

"It's not as though this is a windfall by any means," he said.

But there is a small category of borrowers who might feel shortchanged with a freeze, Habetz said.

If a prime borrower has a mortgage whose rate is ready to adjust, the hike could come close to the introductory rate that was written with some subprime mortgages during the boom, Habetz said.

Since mortgages often adjust every year or every six months, the prime borrowers' payments might rise if interest rates rise, while the subprime borrowers' payments remain steady.

But it's difficult to fault subprime borrowers for taking out a subprime loan, because many didn't have other options before buying a home, said Jeff Lazerson, president of MortgageGrader.com, a fee-based mortgage broker.

Although loans insured by the Federal Housing Administration had often been seen as an alternative to subprime loans, the loan limit on an FHA-insured mortgage - which ranges between about $200,000 and about $362,000 - excluded that option for many borrowers in pricey areas, he said.

FHA-insured loans can also require a few thousand dollars upfront and exclude borrowers with recent credit troubles.

Even though subprime borrowers won't ultimately make out better than most prime borrowers, the real source of frustration might be that the subprime borrowers didn't have to live up to their agreement, Gumbinger said.

"People think, 'If I'm expected to live up to the terms of my agreements, why is someone else who failed, or will fail, deserve special consideration?'" he said.