The real estate blog.

A new plan to help struggling mortgage lenders was released today. The plan calls for homeowners that would be forced into foreclosure or a short sale to issue an IOU for the difference between what they owe and what their home is currently valued. In turn the lender would reduce the loan amount and loan payments. Should home values rise again, the IOU would be exercised by the lender.

But instead of having lenders forgive the difference between the old mortgage and a house’s current resale value, called a short sale, the OTS advises that lenders issue a warrant or “negative amortization certificate” for the difference. If a home regains its market value and is then sold, lenders have first claims to the profits.

Like the super SIV plan that failed in December, I think

this plan demonstrates exactly how desperate many mortgage lenders are. This is a one sided plan allowing accounting chicanery to take losses off the books without the lender having to suffer a loss.

The hope is that this plan will help prevent foreclosures while minimizing the hit that lenders will take, all without putting any burden on the taxpayers.

This mortgage plan will count the negative amortization certificate as an asset thus freeing lenders to make more loans. Further, it won’t require legislation as it can be adopted by lenders on a voluntary basis.

Pending legislation that calls for similar measures, but favor the borrower, are drawing complaints from the lending industry. The Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008 call for bankruptcy judges to lower loan balances for underwater homeowners. The difference being there is no IOU to the lender for the difference. Industry insiders claim this legislation would raise interest rates. Quite frankly, either plan will raise interest rates. It’s just a matter of where and how much.

Both of these Acts could be voted on as soon as next week.

The difference between the legislation and the industry plan is quite telling. It seems lenders want a free pass for their mistakes, but won’t allow homeowners the same privilege. Lenders had the opportunity to look at every deal, in detail, before they wrote the funding check. Instead they relied on computer models, rising home values and the mortgage backed securities system to ignore their due diligence responsibility.

Since the industry plan doesn’t require any legislation, participating lenders could adopt the policy without any oversight. Passage of The Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008 would stymie the industry plan. Maybe more homeowners would avoid bankruptcy if their mortgage balances and payments were lowered before having to take that drastic step?