It has been said by many recently that the mortgage crisis we're in is not a subprime crisis, rather -- it is a home value crisis. The core problem that many homeowners have "negative equity", having a higher mortgage balance than home value, prevents them from refinancing out of Adjustable Rate Mortgages or other high rate products, and sometimes ends in forced or voluntary foreclosure.
FT reports today that the OTS (Department of Treasury: Office of Thrift Supervision) is proposing a solution involving what they are calling "Negative Equity Certificates". In this solution, eligible borrowers would be able to refinance out of their current loans and into FHA guaranteed loans based on the current value of the home. The original lenders would be paid back part of their loans, and issue this Negative Equity Certificate for the short balance. This would be a lien against the property, like a second mortgage, but without interest. If or when the home is sold for more than revised value, the overage would be immediately applied to the original lender's Negative Equity Certificate lien.
The plan is refreshing insofar as it limits taxpayer exposure to credit crisis risk, and presents a win-win situation for borrower and lender with lenders' interests protected in the case the home prices recover.