Back in 2005, a pulse was about all you needed to qualify for a home loan. Times have certainly changed. Nowadays, amid fears of a recession and declines in home values in many parts of the country, foreclosures have become front-page news as the subprime mortgage crisis continues its downward spiral.

The Bush administration’s mortgage-rate freeze plan, unveiled in early December, intends to prevent foreclosures by halting interest-rate increases for five years on adjustable-rate mortgages (ARMs) scheduled to reset in the next two years. Other homeowners may see some relief from another plan, Project Lifeline, announced in February. Six major mortgage lenders formed the plan, which gives delinquent borrowers an extra 30-day grace period to get back on track before their homes are foreclosed.

But for most homeowners, time may be a more effective ally than either plan in the struggle to get out from under.

Freezing interest rates is intended to help subprime borrowers who are struggling to keep up at the introductory — or “teaser” — rate. These homeowners may be unable to pay their mortgage every month if their interest rate spikes.

An early February report from the Hope Now alliance, a group of lenders, investors and nonprofit groups formed late last year in response to increasing mortgage defaults and foreclosures, indicates that 545,000 subprime borrowers were helped in the second half of 2007. Only a reported 150,000 were helped through permanent loan modifications, however. Hope Now is averaging 3,200 calls to its hotline each day from troubled homeowners.

Foreclosures are in no one’s best interest. Lenders and investors have no way to recoup their losses selling in a weaker market. Additionally, addressing each defaulted borrower on a case-by-case basis is time-consuming for servicers, says John Mechem, spokesman for the Mortgage Bankers Association. The rate assistance plan, he explains, “provides a fast-track approach to help a large number of borrowers with a minimum of effort so that servicers have more resources to help the more troubled cases.”

Although a subset of borrowers is being helped, the plan has met harsh criticism. Many experts and homeowners alike believe it won’t do enough. “It’s going to be helpful but only in a limited way,” says Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. “Many struggling homeowners are beyond the scope of the plan.” Only a small slice of the subprime mortgage population, generally defined as those borrowers with relatively high default probability based on their blemished credit history, will actually see relief because of the complicated and narrow eligibility requirements.

To qualify for help, borrowers must:

  • Have taken out a subprime, residential ARM between January 1, 2005, and July 30, 2007 
  • Expect their monthly payment to increase sometime between January 1, 2008, and July 31, 2010 — and the increase must be greater than 10 percent 
  • Live in the home covered by loan 
  • Have less than 3 percent equity in the home 
  • Possess a weak credit score (lower than 660); the score cannot have improved more than 10 percent since origination of loan 

Who doesn’t qualify?

  • Anyone whose rate has already reset or who has already refinanced 
  • Anyone delinquent or in foreclosure 
  • Anyone who is more than 30 days late on payments or has had more than one 60-day late payment in the last 12 months 
  • Anyone eligible for an FHA secure loan 

Moreover, the plan is not a government mandate. The lenders and investors who hold the mortgages can decide whether to implement the relief. The Bush administration claims the plan will help up to 1.2 million borrowers. Of an estimated 130 million home mortgages, 13 percent were taken out by subprime borrowers, and an even smaller percentage of those mortgages were ARMs. Given the voluntary nature and strict eligibility requirements, some experts predict only a small percentage of these borrowers will see some relief. A December study by the bank UBS estimates the plan will help between 340,000 and 400,000 borrowers.

Robert Gnaizda, policy director and general counsel for the Greenlining Institute, a public policy research and advocacy group in Berkeley, Calif., estimates that about 240,000 borrowers will qualify. “It’s a grossly inadequate plan, presented as a comprehensive plan,” he says. Meanwhile, the Center for Responsible Lending, a resource for opponents of predatory lending, recently released estimates that the plan will prevent only 118,200 foreclosures. Though the numbers and opinions are all over the map, it’s clear that few borrowers in the vast pool will qualify for loan modifications.

“Rising home prices bailed out a lot of bad decisions on the part of investors, lenders and borrowers,” says Keith Gumbinger, a vice president at HSH Associates, a financial publisher based in Pompton Plains, N.J. As home prices have fallen, homeowners who used the equity in their home as a cash source are now paying for it.

Aside from voluntary lender assistance, the longer-term solution to the subprime mortgage mess may simply be market forces. A firming of house prices, Gumbinger says, will be a step toward resolution.

“There are no viable options in the marketplace to refinance — subprime lenders have closed their doors and gone away,” he says. But as prices begin to increase, homeowners will start to have more equity in their homes and more opportunities to refinance their way out of trouble. This may be a tough year, but the Mortgage Bankers Association predicts prices should increase between 1 percent and 2 percent in 2009. “Twelve months from now,” Gumbinger says, “the mortgage market will probably look very different.”