Plan would allow refinancing of some underwater mortgages

A proposal to allow some creditworthy homeowners to refinance underwater mortgages has become part of settlement talks between government officials and major banks over botched foreclosure paperwork.

California would be a major beneficiary of such a plan because it leads the nation with 2.1 million mortgages in which the homeowner owes more than the value of the home, according to Santa Ana industry research firm CoreLogic Inc.

The proposal has been floated in hopes of luring state Atty. Gen. Kamala Harris back into the talks, according to a person familiar with the discussions who was not authorized to speak publicly.

Last month, Harris pulled out of settlement talks involving most state attorneys general and federal officials. She said a proposed deal didn’t do enough for California and promised to launch a tougher investigation into the paperwork problems caused by so-called robo-signing, the illegal or questionable methods lenders used in signing foreclosure documents.


The new proposal would apply to people who are underwater on their homes but making mortgage payments on time. Only mortgages owned by banks — about 20% of all mortgages — would be eligible.

Most mortgages are owned by investors as part of mortgage-backed securities. The plan was first reported Tuesday by the Wall Street Journal.

“We have not seen any such proposal,” Shum Preston, a spokesman for Harris, said Tuesday.

California’s participation is seen as crucial to a far-reaching deal with major mortgage servicers to settle allegations of foreclosure abuses.


Harris implied when she left the talks that California could rejoin if a settlement did more to address the state’s foreclosure problem.