Bankruptcy & Foreclosures

We may all owe the OTS a big thank you before all is said and done in the current economic slump of late. Don’t feel bad if you aren’t familiar with the OTS, when all goes well economically, they are rarely heard from. The Office of Thrift Supervision (OTS) is fighting for homeowners all across the country by urging federal savings and loans lenders to actually refinance your mortgage for you. That doesn’t sound too impressive at first but there’s more. This refinance would reduce the mortgage balance to the current market value of the home rather than how much you actually owe on the loan. Since home values have been on a steady decline, many homeowners are stuck with mortgages that are actually higher than the price of the house itself!

However, the OTS isn’t foolish enough to believe that the lenders should have to eat the difference on countless mortgages where the home value fell throughout the US. Their proposal would simply defer the balance in the event that the housing market regains its footing in the future. Under this proposal, lenders would issue a negative amortization certificate along with the refinance for the difference. This certificate would basically state that if a home happens to regain its market value while you are paying on a lesser amount and then you decide to sell that house at the inflated value, the lender would have claim on the profit.

Many mortgage holder will be eligible for this program, should it be fully approved, as it looks to target subprime loans, adjustable rate mortgages (ARMs), negative amortization mortgages and interest-only mortgage borrowers.

Naturally on the borrowers side of the coin, there are some major benefits especially to individuals who have no intention of selling their home before paying off the mortgage balance. The fact that the lender could stake claim in future profits may scare off many who are considering the benefits of the program but remember that even as it stands, the lenders are really taking the lion’s share of the risk in this situation. The idea to convince lenders to participate is that it would offset some of the high-costs associated with proceeding with foreclosures. At least the certificate would entitle the lender to recover a portion of their losses should things take a turn for the better.

The bottom line is that although the OTS’ plan has yet to be approved, it looks promising thus far and may prove adequate in both slowing down (or preventing entirely) foreclosures while reducing the lender’s losses in the process.