By Alan White
A big stumbling block to renegotiating mortgages in danger of foreclosure is the reality that many homeowners now owe more than their home is worth. This situation is sometimes referred to as being "underwater." Servicers of securitized mortgages (prime and subprime) are often willing to write down the amount due on the mortgage if the homeowner is selling (and has a buyer.) Servicers are much less willing to write down the principal loan amount to the home value to allow a homeowner to refinance with a cheaper or less risky mortgage that will permit them to save their home: a "short refi." The concept of writing loan balances down to market value is familiar in the commercial real estate sector, but seems for some reason more controversial for consumer and residential loans, despite the fact that in many cases a short refi will yield a better return for the investor than a foreclosure.
Buried in a story in today's Wall Street Journal is a report that some servicers may start getting strong federal agency encouragement to do short refis. John Reich, director of the Office of Thrift Supervision, regulator of federal savings banks (like WaMu) revealed that OTS is working on a short refi plan. The other part of his announcement today was that the thrift industry lost $5.2 billion in the 4th quarter of 2007, and that we should expect to see some thrift failures in the coming year.
Today's Washington Post provides more details (login required). Lenders writing down mortgages would receive negative equity certificates that might have some market value, to mitigate their losses. Not clear how the negative equity interest would retain value yet permit the refinancing lender to get an insurable first mortgage.
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