Under the plan, the homeowner would be able to refinance the mortgage with the U.S. Federal Housing Administration, based on the current value of the home. So instead of a US$240,000 mortgage, he would now have a US$198,000 mortgage (we’re assuming US$2,000 was paid in cash).

The FHA would buy the US$240,000 loan from Bank ABC, giving it US$200,000 and a “negative equity certificate” for the remaining US$40,000. Were the homeowner to eventually sell the home, the FHA loan would be paid off first, then the original lender, up to the value of the certificate. Any money left over would go to the homeowner.

The homeowner wins because he is now paying down a smaller debt and if interest rates are the same or lower than when he first bought the home he also has lower monthly payments.

Bank ABC wins because it gets most of the money back from the original loan and may still recover the rest. This is far better than the borrower walking away from the now-onerous original mortgage, as a growing number of homeowners are currently doing.

“It beats foreclosure,” Jaret Seiberg, an analyst at Stanford Policy Research, told the Washington Post.

This will help lenders limit their losses and avoid an “avalanche of borrowers who choose to walk away from the mortgage,” Scott Polakoff, the OTS senior deputy director, told Bloomberg News.

The “negative equity certificates” would be tradable, and creators of the proposal anticipate there would be a market for them. Initially the certificates would be worth pennies on the dollar, but as the housing market recovers and home values rise, so too would the value of these certificates.

How does this help solve the subprime mess? It affixes a known value to mortgages that are in the greatest danger of going into default.

Huge investment vehicles have been built around such risky mortgages, and because no one knows what they’re really worth (their value will keep declining as long as home values fall), financial institutions around the world are facing hundreds of billions of U.S. dollars in potential losses.

Even if these mortgages end up being worth 83 percent of their face value (as in the example above), it at least has a known value. And with “negative equity certificates,” there’s also a chance the mortgages could end up being worth more.

The White House and members Congress have yet to comment on the proposal.

“We have got some good initial indications of interest and we are just hoping for this to be part of the solution,” an OTS spokesman told the Financial Times.

Sorry, I’ve e-mailed my tech guy, but the podcast is via a service, Talkr. They may be having a problem.

Urbandigs,

I wish I could say more. Tett’s phrasing implied the disclosure was voluntary. If so, I’d say this was an effort to promote transparency. But a number of deals are being unwound in Canada. Even if not by choice, it may lead to a wee outbreak of transparency if (as Marcus Aurelius believes) this is court mandated and other courts follow suit.

As noted, a lot of this paper doesn’t trade; some CDOs were never intended to be traded. The ABX isn’t a great proxy, but it’s the only game in town now re a pricing benchmark.

Marcus Aurelius,

You may be right, but I had a different line of though (and I may be reading too much into Tett’s turn of phrase), I wondered whether JPM could have satisfiied the court by providing less specific valuations, such as the weighted average per rated security. That would have met the need to provide a valuation (remember, this is for investors in SIVs, so this is to tell them why they got, rather than a more detailed breakdown). Other SIVs have been liquidated, admittedly in other jurisdictions (I think pretty much all other ones so far were in the UK) but whatever reporting obligation they had to the court and investors evidently did not trigger disclosure of prices for specific securities.

___

This was a “decision”? Typically, the court orders the disclosure of such information during the discovery process prior to hearing a civil matter. No one gets to “decide” what they will, or will not, disclose.

Unless JPM is being charitable – releasing information not pertinent to the trial (in which case, they open the door to a charge of obstruction) – they had no choice in the matter.

I guess the jig is up, up.

Does this mean:

1) more write downs
2) the end is near
3) transparency is coming whether we like it or not
4) nothing, its done already

I would love if we can get a YVES OPINION on each of these topics so the less educated, like myself, can understand what this NOW MEANS!

This to me is the key quote-

“The estimates are likely to be scrutinised by auditors and regulators since they come at a time when the issue of security pricing has become controversial.”

Since when have we had functional auditors and regulators in the highly leveraged derivative market?

Actual mark to market…