OTS Plan Refinances Negative Equity Borrowers

OTS Director John M. Reich described the plan in testimony last week before the Senate Committee on Banking, Housing and Urban Affairs, according to a transcript of his prepared remarks.

The plan calls for depository institutions to refinance borrowers who have negative equity utilizing loans insured by the Federal Housing Administration. Proceeds from the transactions would be used to partially pay down the loan balance, with the remaining balance satisfied with a negative equity interest by the investor.

If the property is subsequently sold and there are any proceeds remaining, investors with negative equity interests would be paid. The borrower would receive any remaining proceeds in excess of the investor’s interest, though one possibility would be to provide the borrower with a piece of any appreciation — even if the negative equity interest is not satisfied — in order to provide incentives for the borrower to maintain the property, maximize the sales price and boost appreciation.

Another scenario under the plan calls for lower loan-to-values and higher FHA premiums for riskier borrowers.

OTS said its plan does not bail out investors or imprudent borrowers, reduces the loss investors would have suffered from a foreclosures and avoids windfalls for borrowers at the expense of investors if appreciation does occur. In addition, the negative equity interest could become a marketable financial instrument that could be traded.

Reich estimated that around 2 million subprime hybrid mortgages will reset this year, though nearly one-third were delinquent before the reset.

Around 1,035,000 borrowers have received loan workouts since July through the HOPE NOW alliance, including 758,000 repayment plans and 278,000 modifications, the group reported. Modifications are involved in a growing number of subprime workouts — with half of subprime loan workouts in January being accomplished through modifications compared to 35 percent during the fourth quarter.

HOPE NOW said the number of loan workouts achieved were nearly three times greater than completed foreclosures.

Other recent foreclosure prevention activity included the donation of $2 million from the Genworth Foundation for the Homeownership Helps initiative. Funds will go to HomeFree-USA, National Community Reinvestment Coalition and NeighborWorks America and be used for foreclosure prevention, home purchases and research.

The Association of Community Organizations for Reform Now announced 350 of its members are holding a rally today at the Capitol as part of its annual legislative and political conference this week in Washington, D.C. ACORN is lobbying for passage of the Foreclosure Prevention Act of 2008 next month, as well as the Homeownership and Preservation and Protection Act of 2007 and the Emergency Home Ownership and Mortgage Equity Protection Act.

The Colorado Housing and Finance Authority was awarded a $1.5 million federal grant from the National Foreclosure Mitigation Counseling Program. The funds will be sued to promote the state’s foreclosure hotline, 877.601.HOPE, and help 12 local counseling agencies hire and train additional foreclosure mitigation counselors.

Rescue That Home announced a program where originators can earn fees for helping borrowers avoid foreclosure. The company claims about four to five hours are involved in each case, and the cost for the program can be recovered on the first deal. Borrowers pay one-third of the fee up front, then pay the remainder of the fee when a deal is worked out with a lender.

SellQuickForCash.com said it helps Phoenix-area borrowers facing foreclosure by purchasing their properties in as little as three days with no Realtor fees.

The National Multi Housing Council and the National Apartment Association Joint Legislative Program issued a statement warning against a $9 billion plan for homebuyer tax credits. The groups noted such a move would create an incentive for lenders to foreclose and entice buyers with the proposed $15,000 credit.

Smoothstone IP Communications said it collaborated with several Louisville, Ky., counseling agencies to help route phone calls from delinquent borrowers to various counselors depending on their loan status. During the first day, 500 calls were handled.