Yesterday, the Office of Thrift Supervision, or the OTS, proposed a new plan to help borrowers. They want federal savings/loans lenders to refinance loans through reducing mortgage balances to the current market value of the homes. As the market is struggling, many home values have fallen to a value below the amount of the mortgages taken on the homes.

At the moment many lenders are having to do a short sale, which is where they allow borrowers to sell their home at the current market worth and the lenders settle for this price instead of the amount originally borrowed on the home. What the OTS is proposing is that now instead of doing this, the lenders make a warrant/negative amortization certificate for the difference of the current value and the loan amount. Once this is done, if the home later returns to the market value it previously held and is sold, the lender can claim the original amount owed.

For example, if a home was bought with a loan amount of $200,000 and the current market value fell to $150,000 the lender could issue the warrant for $50,000 (the negative amount difference). Then if the home was later sold with the value having gone back up to $200,000, the lender could could reclaim the full 200K. There might even be the possibility of the lender being able to get interest on the $50K.