Mortgage Bailout? Don't throw the "Tax Payer" out with the Water?

You know the Office of Thrift Supervision (OTS - don't you like acronyms)?  The OTS has authority over federal savings and loan lenders.  The OTS unveiled a plan to help mortgage borrowers in trouble, but only those borrowers who hold mortgages with federal savings and loan lenders.  The plan suggests their lenders refinance loans by reducing mortgage balances to the current market property values.  Federal savings and loan lenders would do this by issuing what the OTS called a "Negative Amortization Certificate" or warrant for the deficiency balance.  This voluntary plan made no suggestion of "freezing rates".  Thus, I believe that the original rates and adjustments would apply with the refinance or renegotiation of terms. 

Why would lenders want to do this?  First, the lender would be able to recoup all or part of the warrant if the house sold sometime in the future for more than the mortgage balance.  The lender would even be able to collect interest on the warrant amount.  Any amount of money over the new loan, warrant and interest on the warrant would go to the homeowner.

The second reason federal savings and loan lenders might go for this plan would be this effort might slow down foreclosures, minimizing the hit to lenders without having a government bail out. Keep in mind, that any loan modification or workout only makes sense if the borrower has the ability to make the payments going forward.  But, with the rate not being frozen, how many borrowers going forward will be able to pay their mortgage after a rate change (assuming an ARM)?  Also keep in mind that this is voluntary.  It seems obvious that lenders in a "declining market" may not agree to participate because borrowers would be short right after a refinance. 

The OTS plan seems to target borrowers who hold delinquent ARMs, borrowers who were extended when they originally obtained their mortgage.  Tell me, if they are behind today, do you think they will be able to afford the new payment when the rate increases?  If you come up with the same answer I did, you would be just trading one foreclosure for another.  Could this plan work with changes?  Maybe, if you add freezing rates when you lower the principle balance and issuing the warrants.  But now, wouldn't you be throwing the "taxpayer" out with the water?

You can find AJ Nisen on Active Rain at Contra Costa California Mortgages  or at Bank of America Mortgage