Negative Equity Certificates

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profette_IHB

profette_IHB

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Plan to Help Homeowners Gains Steam

"Federal housing agencies are moving closer to a possible plan to help homeowners caught between rising interest rates on their mortgages and falling home prices that preclude selling or refinancing to pay off those debts, officials said Saturday.

The plan centers on so-called negative equity certificates. For such borrowers — whose debts exceed the resale value of their homes but who also had enough income to afford their payments before their mortgages reset to higher adjustable rates — government housing regulators would offer lenders a chance to refinance a new, smaller, federally insured mortgage. In exchange, a lender would receive a negative equity certificate entitling the holder to a payback if real estate recovers and the home is sold for a price greater than the original mortgage..." NYT, 3/30
 
In essence a Govt. Back 3rd mortgage. In which they pay for interest. You know, at some point, people need to take responsibility for their own messes and fix them.

-bix
 
That is the not the correct way to look at it. It is a call option on a percentage of the upside of the house - not a 3rd mortgage - and probably a zero coupon bond (remember those?). The note holders will then be able to trade those call options and the bond. The current discussion only seems to contemplate the option, but It will probably behave more like a zero coupon bond with a call option. The options will be valued like way-out the money stock options. So, one might say this will push prices down quickly to the right level because it will force a valuation decision if done right. Otherwise, they will be creating a synthetic valuation which may or may not reflect market.
 
I really doubt the average sucker. . .er. . .buyer is going to go for this.

Under certain circumstances it might be a good idea. But, having been burnt, I doubt that most will sign something NOW that they don't understand, having gotten into trouble signing other stuff that they didn't understand.
 
Driver,

I was just reading up on those... I wholeheartidly agree. I need more time to reflect on this and how one might abuse this. I don't know, i guess its just in my nature.

-bix
 
IrvineRenter et al.,

Do you feel that if the government and financial institutions approve of this "solution", then the actions would stabilize the markets? And if so, then I'm sure it would be a bad time to be out of the equities market, no?

Edit: I mean, does this allow for better valuations for the assets on the books of these financial institutions?
 
"Do you feel that if the government and financial institutions approve of this "solution", then the actions would stabilize the markets?"

No, but this will help the lenders somewhat. Nothing is going to stabilize the markets, but if some form of "negative equity certificate" or zero-coupon bond is put in place, it may prevent some homeowners from walking who could afford to pay their mortgage. The effect would be to slow the rate of decline -- which is remarkable right now -- but it will do nothing to change where the bottom lies.
 
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