Treasury studying home refinance plan

Voltron says: This "negative equity certificate" is a kooky idea. It is basically sticking the lender with a lien on the house. It's worth the same as a bull call spread that never expires. It would theoretically be initially worth about half of the amount lost on the loan and the banks will have to realize the loss. Banks will probably try to sell these certificates on the open market. This will create some downward pressure on house prices because investors can buy the certificates instead of buying actual houses. It doesn't change the fact that it is in the best interest of the homeowner to default.

By John Poirier

WASHINGTON (Reuters) - The U.S. Treasury Department is studying a new regulatory proposal aimed at prodding servicers to help homeowners facing foreclosure to refinance their mortgages, the department's undersecretary, Bob Steel, said on Thursday.

The program would create "negative equity certificates" that would in the long term help servicers recoup losses from refinancing a mortgage when a home's value has dropped.

The proposal, being developed by the Office of Thrift Supervision (OTS), would operate along with other Bush administration programs to modify mortgages provided to borrowers with poor credit histories and who are about to lose their homes.

"We're just learning about it," Steel said at the Reuters Housing Summit. "I spoke to Mr. (OTS Director John) Reich last night. I think they're still working out the details too."

"But it's more ideas," Steel said. "Other ideas from other people is a good thing."

The OTS regulates the thrift industry, which is largely comprised of mortgage lenders ranging from small, locally-owned institutions to big companies such as Countrywide Financial Corp and Washington Mutual Inc.

The proposed program is in its early stages and comes at a time when officials fear an increasing number of people would rather just walk away from homes which have seen values fall during the U.S. housing and financial turmoil.

If implemented, the program, possibly with Federal Home Administration assistance, would apply to all mortgages but it appears it would mainly focus on subprime loans.

It would not necessarily guarantee a full repayment to the servicer because the value of the certificates could be publicly traded and fluctuate with home prices, OTS officials have said.