The clock is ticking fastest for those credit-challenged borrowers who have been unable to improve their credit standings.



And the timekeeper isn't the lending community, at least not this time. Rather, it's lawmakers, regulators and consumer advocates who, in trying to protect future borrowers from the more dangerous variety of ARMs, are slamming the door on those who already have them.

Millions of these unconventional loans, often called exotic, or sometimes even toxic, mortgages, have been made during the past few years in the name of affordability. In many cases, financially savvy borrowers use them to conserve cash or keep their money working in other investments.

But in some instances, these loan products pay option ARMs, interest only loans and shorter term adjustables that have fixed rates for two or three years and then switch to rates that reset to the market rate once a year thereafter have been put into the hands of the wrong borrowers.

These include cash-starved people who couldn't afford to buy a house without a loan at the lowest possible starting rate and/or minimal monthly payments; folks who were depending on ever-rising home prices to bail them out when the time came for their loans to adjust; and risky subprime buyers who had big-time credit issues and shouldn't have been given any kind of mortgage at any rate, let alone one that put them in harm's way a year or two down the road.

In many cases, greedy mortgage brokers and loan officers who cared more about lining their own pockets than the welfare of the borrowers they serve originated hazardous loans.

The loans were gobbled up without question by funding lenders to keep their volumes up, and sold on through the fee hungry secondary market to Wall Street investors who had no idea how the loans would perform.

Now the verdict is in, and the situation isn't pretty. Early payment defaults are rising, and the foreclosure rate is on the upswing. As a result, investors are demanding that lenders repurchase their faulty loans, forcing those thinly capitalized firms without much money in the bank to close their doors.

Lenders also are taking steps to protect themselves by revamping and tightening their underwriting guidelines to make sure that, in the future, only creditworthy borrowers can qualify for the exotic types of adjustable loans.

So, too, are the conduits that keep mortgage money flowing by purchasing loans from primary lenders and packaging them into securities for sale to investors throughout the world.

Regulators and legislators who oversee the lending process also have moved to protect borrowers belatedly, according to some critics. And of course, all this has lenders griping about tightening the noose too much.

Lenders argue that the situation isn't nearly as bad as some pundits make it out to be and that they have made the necessary adjustments to keep the situation in check.

They also say the new rules, which are intended to protect future borrowers, will only make the situation worse for borrowers who already are swimming in the deep end of the loan pool.

What about the millions of homeowners who already have these products and need to refinance?. We cannot simply abandon these borrowers, lest they get trapped in these loans.

We know that loans being made today are significantly more conservative and represent the best loans made in a decade, he says. The market is working. It has, and always will, move at lightning speed compared to regulators or legislators.

At the same time, he worries that, if the noose is tightened too much, it will exacerbate the foreclosure problem, especially among credit-impaired borrowers who have yet to right themselves and will have trouble qualifying for a new subprime loan a second time. And others have the same concern.

Tighter restrictions will leave a tremendous number of borrowers holding the bag. They'll be stuck in something they can no longer afford.

Subprime specialists say the same thing. How are we going to take care of all our current customers if they can no longer qualify for a new loan.

One contingency is some kind of forbearance requirement. Another possibility is a moratorium on future interest rate adjustments so borrowers would have additional time to clean up their finances. Or perhaps someone will come up with a rescue loan to bail out troubled borrowers.

But borrowers shouldn't wait for lawmakers or regulators to act. Even if it will be months before your interest rate resets, you should start looking now for alternative financing. Even if you are a Class A borrower who will have no trouble qualifying for another loan, begin the refinance process now, before a rate adjustment is near.

And whether you are a subprime borrower or a prime one, don't make the same mistake twice. Unless you know exactly what you are doing, stay away from unconventional financing. If you don't, you might not get another chance at the brass ring.

People better wake up. "If you get it wrong a second time, there won't be a third time.