The Housing Chronicles Blog: Postponing mortgage debt vs. forgiveness

Wednesday, February 20, 2008

Postponing mortgage debt vs. forgiveness

Here's an interesting idea from the Office of Thrift Supervision: instead of forgiving mortgage debt through a short sale, why not postpone the debt and recapture it when the market rebounds? Although the OTS only oversees Savings & Loans, if they convince lenders to pursue such a plan, other financial institutions might follow suit:

The Office of Thrift Supervision (OTS) is urging the federal savings and loans lenders under its authority to refinance loans by reducing mortgage balances to the current market values of the homes. Thanks to falling home prices, many homeowners are now stuck with mortgages that are actually worth more than the houses themselves.

But instead of having lenders forgive the difference between the old mortgage and a house's current resale value, called a short sale, the OTS advises that lenders issue a warrant or "negative amortization certificate" for the difference. If a home regains its market value and is then sold, lenders have first claims to the profits...

The hope is that this plan will help prevent foreclosures while minimizing the hit that lenders will take, all without putting any burden on the taxpayers...

The savings and loan industry, which held 31% of mortgage loans last year, saw record losses of $5.24 billion for the fourth quarter of 2007, according to the OTS.

Few details about the plan have been settled, but it would not involve any legislation, nor would it be mandated in any way. Adoption would be on a voluntary basis by the hundreds of thrift institutions in the United States, like Washington Mutual (WASH) and IndyMac Bancorp (IMB)...

...rather than spending $50,000 to foreclose on a home or to write-off the negative amortization in a short-sale, they get a certificate that permits them to share in the up-side, if and when housing markets recover.

So does this plan have a shot?

1 comment:

Inline Business said...

This plan would help troubled mortgage borrowers today, the biggest attraction for lenders is that rather than spending $50,000 to foreclose on a home or to write-off the negative amortization in a short-sale, they get a certificate that permits them to share in the up-side, if and when housing markets recover.

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