The plan targets a looming crisis. Many subprime mortgages came with so-called teaser rates—interest rates that start out low but quickly reset to become significantly higher. Many of those loans—more than $350 billion worth, in fact—are going to reset next year. That means that hundreds of thousands of people who are currently able to pay their mortgages are about to see their payments rise by hundreds of dollars a month.If the credit and housing markets were more buoyant, these people might be able to refinance their loans or sell their homes. But the sharp decline in housing prices and the tightening of credit standards has closed off those options for most subprime borrowers, which pretty much guarantees a big increase in the number of foreclosures. The Paulson plan is meant to buy borrowers—and, arguably, the economy—some time, by postponing the interest-rate resets for five years.
Not for everyone, though. The plan sets up a system of triage, separating borrowers into three categories: Those who will be able to keep paying after the rates reset, or else refinance their loans; those who can pay now but won’t be able to when the rates go higher; and those for whom even the current rates are too high. Only the second group will get help. Also, the plan doesn’t go into effect until next year—if your loan resets on Dec. 31, you’re out of luck.
Read More
