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A New Way to Tackle Foreclosures
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An insurer would not assume this risk except with a new loan that meets its underwriting requirements and carries an insurance premium scaled to the risk. Such deals must be done one at a time.
But MPI would be an option that facilitates such restructured deals. To meet its requirements for an insurable loan, the insurer would require the investor to write down the loan balance to 90 or 95 percent of the current property value and reduce the interest rate to the prime rate. If there is a second mortgage, the investor would have to negotiate a payoff with that lender.
The investor would take a loss on the modification, but it would be far smaller than the loss that would have resulted from foreclosure of the original loan. The investor might also receive an equity certificate equal to the write-down of the balance (or balances, if there is a second lien), which would entitle it to a share of future appreciation in the house's value.
The borrower would get a new start with 5 or 10 percent equity, no unpaid interest and a reduced payment based on the lower rate. Because the payment reduction would be partly offset by the addition of a mortgage insurance premium, this plan would work best with higher-rate mortgages.
This application of MPI would be similar to a mortgage-relief proposal under consideration in Congress, but there are some major differences. Interested readers can get a longer paper that discusses them by writing to me.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site, http:/
© 2008 Jack Guttentag
Distributed by Inman News Features
