The OTS - Throwing out a Lifeline
The Office of Thrift Supervision, or OTS as it’s known in the industry, unveiled a plan today that would help mortgage borrowers who’ve either fallen behind or are having problems meeting monthly payments by lowering the balance on the mortgage to match the current market value of the borrower’s home.

Negative amortization, or NegAm for short, occurs when a borrower’s loan payment is less than the interest charged, resulting in the balance of the loan actually increasing. What you get is a losing situation for the homeowner, who basically does not move forward in terms of paying down the loan and thus building their investment. NegAm is much more prevalent these days, and for obvious reasons homeowners not making headway on their mortgages have less incentive to stay in their homes.

The OTS is advising that lenders not ‘forgive’ the difference, but rather issue NegAm certificates, which will allow lenders to collect the difference if and when the house regains its value and is sold. The new scenario would, in essence, become a win-win situation for both the lender and the borrower.

 In the long run, this new scenario makes sense for both parties. The current situation is simply not sustainable, with falling home prices and foreclosure rates rising daily. While all borrowers are eligible for the new program, the borrowers who will likely benefit the most are borrowers with subprime adjustable rate mortgages (ARM), NegAm mortgages, and IO, or Interest Only mortgages.