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Economists and banking industry analysts are increasingly crawling out of the woodwork with ideas on how America can get out of the ongoing mortgage mess. But one financial firm stands out from the crowd with an idea to offer up-to-date homeowners reduced rates on their home loans, with no credit report, and/or consideration of the current value of their homes.

According to the Center for Housing Policy, there’s been a 32% increase in what the Center calls “seriously delinquent” mortgages from 2009 to 2010. Roughly one-in-ten are in that category.

“These new delinquency data confirm that the number of foreclosures is likely to continue to rise," said Jeffrey Lubell, executive director of the Center for Housing Policy, the research affiliate of the National Housing Conference.

In another study, Deutsche Bank estimated that 14 million U.S. homeowners are “underwater” (meaning their loan amounts are higher than the value of their homes), and that number should rise to 20 million by 2010.

How can delinquent borrowers and corner-cutting lenders find common ground and possibly save the U.S. housing market?

The Collingwood Group, a Washington, D.C.-based financial advisory firm, has an idea that they say could keep both parties satisfied. The plan, which Collingwood says would need the full support of both the mortgage industry and the federal government, is built on the premise that as long as so many Americans are behind or underwater on their mortgages, the U.S. housing market will continue to get dragged down.

Essentially, Collingwood proposes a “rapid refinance” plan, with reduced interest rates, and possibly some loan principal reduction, but with a twist.

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Here’s a look at some of the key features of the plan:

  • The program would apply only to borrowers whose mortgage rate is higher than current market rates. Only when a borrower's monthly payment would be reduced by at least $50 would they qualify.
  • No cashing out. This program is intended as a rate reduction program. Homeowners could only accept financial aid if they stay in the home – not if they sell it.
  • Borrowers (owners and investors alike) whose payments would be reduced qualify as long as they have been current on their mortgage for at least two years. That’s it - forget credit scores, loan-to-value ratios, front-end or back-end ratios.Borrowers would qualify based on logic that if they have been current on their (higher rate) mortgages, their payment history would suggest that they could continue to pay their mortgage if their payments are reduced.
  • Home values don’t count. If borrowers have demonstrated a willingness and ability to pay at higher rates - knowing that they are underwater - reward them and give them an opportunity to pay less. Doing this will have the same impact on the economy as an immediate tax cut by putting money directly into the pockets of homeowners without the potentially negative impact to the federal deficit like a tax cut might cause.

Since banks would likely not embrace a plan that tossed credit scores and home values out the window, Collingwood says that the federal government could step in and back the loan modifications, perhaps as FHA-insured mortgage refinance loans.

Collingwood says that its plan will keep families in homes, and would result in banks getting the money they paid out in loans. There is a risk – some critics say that underwater borrowers may bail on banks – but Collingwood cites a Federal Reserve of San Francisco study that shows underwater borrowers are more likely to stay in their homes if given a lower rate or a principal reduction on their home loans.

It’s Collingswood’s belief that underwater homeowners don’t view themselves as full-blown charity cases, but they could use a helping hand. These are people keeping up on their mortgages, but struggling to do so. With a little help from banks, and with the support of Uncle Sam, these homeowners could stay in their homes, reduce the glut of potential foreclosures, and keep neighborhood home values up.

That's not a bad trifecta, but will lenders go along? Sooner or later, they might.

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