Treasury Eyes Refinancing Underwater Private Loans

The Treasury Department is considering ways to help underwater borrowers with private mortgages to refinance into a lower interest rate and reduce the risk of default.

And it appears Treasury officials may expand its Home Affordable Modification Program so servicers can modify those private loans at a lower interest rate.

A Treasury spokeswoman declined to comment about the modification initiative. But she said, "Treasury is continually looking at different ideas to reach homeowners in need of assistance."

Meanwhile, this proposal is creating quite a buzz. Fitch Ratings managing director Bob Curran mentioned Treasury’s initiative in discussing recent housing market trends Tuesday morning in a conference call.

“This plan does not require legislation and allows borrowers to qualify for a lower rate under the existing Home Affordable Modification Program,” Curran said.

HAMP servicers currently modify loans if the borrower is delinquent and in imminent risk of default. Treasury might expand the definition of imminent default to include underwater borrowers with loan-to-value ratios greater than 125%.

Amherst Securities Group estimates there are 308,000 borrowers with loans in private-label securities who are current on their payments and have LTVs above 125%.

If Treasury set the modified interest rate at 4%, nearly 150,000 loans might benefit from a modification. To encourage private investor participation, Treasury would compensate investors for the difference between the original coupon and HAMP modified rate.

A major issue is whether Treasury can compensate investors for five years or 30 years.

Financially, Treasury has the resources to do both. A recent audit by the General Accountability Office said Treasury obligated $29.9 billion in TARP funds to the HAMP program. Just $10.5 billion has been tapped to cover modifications and incentives as of Sept. 30.

“Treasury estimated that $19.4 billion of the $29.9 billion remain available for future modifications and other interventions,” GAO said.