OTS Refi Proposal Termed 'Elegant'

The Office of Thrift Supervision has come up with an "elegant" way to avoid moral hazard and provide an incentive for investors to write down a loan and for second-lien holders to participate in Federal Housing Administration refinancings of troubled subprime mortgages, according to Sen. Bob Corker, R-Tenn. OTS Deputy Director Scott Polakoff told a Senate panel that "negative equity certificates" could be used to balance the interests of homeowners, investors, and second-lien holders. "It seems worthy to explore the possibility that some second-mortgage holders could also share to some degree in the negative equity certificate as an incentive to subordinate their position in a refinance opportunity," Mr. Polakoff said. Sen. Corker said the certificates would avoid the moral hazard involved when a borrower "takes advantage of the program, does a quick sale, and benefits from the writedown." Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., welcomed the OTS suggestion and indicated that he might use it in refining his FHA refinancing bill. "To get the investor to step up and take that haircut, I think you've got to have a proper incentive in there," Sen. Dodd said.