Thrift refinancing incentives studied

A new incentive for lenders to refinance more mortgages is being considered by regulators who oversee the U.S. thrift industry, which suffered a record $5.2-billion loss in the fourth quarter of 2007 as the housing market deteriorated, the U.S. Office of Thrift Supervision said Wednesday.

The OTS said it was looking at a program to create “negative equity certificates,” which would help borrowers stay in their homes and help thrifts recoup losses if a home’s value falls dramatically.

Borrowers would be able to refinance mortgages at current market value, with the loan servicer getting a negative equity certificate that could be redeemed for the lost value once the home was sold, agency officials said at a press briefing in Washington.

“We find this OTS option intriguing, and believe it could quickly gain support in Washington,” said Jaret Seiberg, an analyst with Stanford Group.

Negative equity certificates could be publicly traded like warrants, Seiberg said.

The certificates could help servicers limit losses on loans and avoid an “avalanche of borrowers who choose to walk away from the mortgage,” said Scott Polakoff, OTS senior deputy director. The program would help prevent “avoidable foreclosures,” Polakoff said.

The nation’s 800 thrifts lost $5.2 billion in the October-to-December period, the first quarterly loss in 11 years, the OTS reported. By comparison, the thrift industry had net income of $657 million in the third quarter and $3.1 billion in the fourth quarter of 2006.

About $4 billion of the quarter’s losses came from five thrifts that were forced to write down the value of mortgage assets. Many institutions also raised loan-loss reserves based on expected borrower delinquencies.

For all of 2007, thrifts saw net income dive to $2.87 billion from $15.85 billion in 2006, reflecting write-downs, restructurings, loan loss provisioning and losses on asset sales.