Despite Record Low Mortgage Rate, Subprime Borrowers Are Still Getting Screwed

Protest Foreclosure Mortgage Modification

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Fitch published a study this week (via HousingWire’s Kerri Panchuk) showing that only 5% of the country’s subprime mortgage borrowers have been able to voluntarily refinance since 2009.That’s despite the record-low interest rates aided by the Fed.

The reason is that a vast majority of subprime adjustable-rate mortgages have minimum coupon floors.  Effectively, the borrower is contractually forced to pay a minimum interest rate which is unfortunately high.

As a result, subprime ARMs on average have only declined 20 basis points, to 7.6% from 7.8%.

And the kicker: “Given that approximately 20% of subprime borrowers began with interest-only payments that have now started to amortize, a number of borrowers have higher monthly payments today than they did initially.

Loan modifications (which, unlike refinancing, keep the original loan in tact) remain the principal form of relief for subprime borrowers. While half of subprime loans have been modified at least once since the crash, the pace of new modifications has slowed as the market runs out of qualified borrowers. More than 2 million subprime loans remain on the market.

The percentage of borrowers receiving rate modifications is now roughly 1/3 the pace experienced at the peak in 2010.

While the settlement announced Thursday with mortgage servicers will likely provide some relief, analysts at Barclays Capital said the agreement would have only a slight effect on increasing the pace of modifications, HousingWire’s Jon Prior reports.

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