Mark Winston Griffith

OTS offers new way to skin subprime foreclosure cat

Suggesting that there is a federal regulatory agency that can actually think creatively, the Washington Post reported yesterday that the Office of Thrift Supervision is preparing to introduce a proposal that will allow homeowners whose mortgage debt is larger than the value of their homes, to "refinace into government-insured [Federal Housing Administration] loans that cover the current value of their homes."

The plan apparently tries to address what has become a big impediment to the refinancing of mortgages. Many people are unable to find a new, less expensive, loan to pay off their existing one because either the value of their home has decreased or because the lender over appraised the property in the first place. In either case, lenders can only refinance when the value of the loan is equal to or less than the value of the homeowner's property. A report by the New York State Banking Department recently concluded that for this and other reasons, refinancing has almost disappeared as an option for most subprime mortgage holders.

"Under the regulatory agency's proposal, still in its early stages..[t]he refinancing would pay part of what's owed to the original lender. For the remainder, the lender would get what the plan's backers call a 'negative equity certificate.' The lender could redeem the certificate if the home is eventually sold at a higher price...If the borrower eventually sells the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower...If there's not enough profit to pay off the certificate, the original lender would take a loss, which makes this proposal a gamble."

Perhaps the most interesting, and ambitious, aspect of the plan is that it assumes that there will be a market where these "certificates" will be traded for pennies on each dollar of home value.

The plan is still very much in formation, and, as with other plans from the Bush administration, the devil will definitely be in the details. Past responses to the subprime crisis have often failed to prove effective because so few people have actually qualified for the proposed "help." In the meantime, any initiative that seeks to help homeowners build bridges to affordable refinance options and stay in their home, is certainly welcomed.

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Posted at 8:04 AM, Feb 22, 2008 in Economic Opportunity
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