Mortgage Mod Squad

Variations on that approach may be the next big development on the horizon in foreclosure prevention. Many buyers in the past several years made no down payments and bought costlier properties than they could afford. Some now face huge monthly payment boosts and negative-equity situations. They can't afford their mortgages, nor can they afford to refinance because they owe more on the loan than their houses are worth.

Congressional leaders in have urged private lenders, Wall Street, Fannie Mae, Freddie Mac and the federal government to devise programs to help thousands of boom-era buyers who face foreclosure this year or next.

One option that is gaining significant attention has been advanced by a loss-mitigation firm, Lyons McCloskey. The plan would work like this: Borrowers in serious default would be refinanced into government-insured or -guaranteed fixed-rate programs such as those run by the FHA, Veterans Affairs and the Rural Housing Service. If their loan balances exceed FHA statutory limits, the refinancings could be provided through Fannie Mae or Freddie Mac.

The initial balances on the new mortgages would be what the borrowers could afford to pay using their current incomes at market rates. Any shortfall between the amount of the new loan and the balances owed on the unaffordable previous loan would be recast into a "soft" second lien -- a second mortgage or deed of trust carrying a minimal or zero interest rate and no monthly payments. The second lien would be due and payable in a lump sum at sale of the property or whenever the borrowers can afford to retire the debt.

Credit risks on the soft second mortgage would be shared by Wall Street bond investors, the federal government or other mortgage market players.

The concept wouldn't keep everybody out of foreclosure, nor would it be extended to people who inflated their incomes or recklessly bought properties they could never afford.

But it could be one answer for payment-shocked borrowers who simply got in over their heads and mistimed the end of the boom.

Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.