March 5, 2008 - FED Chairman Ben Bernanke is urging lenders to renegotiate home mortgages with distressed homeowners. As a sign of how serious he considers the current home lending crisis to be, Bernanke suggested that lenders consider reducing the amount of principle that some borrowers owe on their homes. While such a move would certainly help many homeowners, it may be impossible for lenders to pull off on a large scale.

In his statement, Bernanke was clearly attempting to send a message to lenders that they need to move quickly if they hope to stave off a flood of foreclosures. He clearly made the point that it may be more expensive for lenders to foreclose on some homes than it would be for them to reduce the amount of money that borrowers owe on them.

Lenders that own the loans that they service have the ability to act quickly on Bernanke's advice. Known as "portfolio lenders", these companies don't sell their loans on the secondary market after funding. But portfolio lenders are a minority group. Most lenders, including most of the country's large banks, sell their loans very soon after they fund. The original lender will probably continue to service these loans, but they don't own them and they can't agree to reduce the amount of money owed on any of them.

Complicating matters further, most sub-prime loans are diced up and sold as securities. Anyone owning one of these securities may own a portion of many different loans. But since the companies responsible for putting these securities together didn't bother to track individual loans to individual securities (in other words, connect the dots from one to the other), it may actually be impossible to say who owns a particular loan. Such loans - which make up the majority of sub-prime loans - may be impossible to renegotiate.

While all of this may seem confusing, the news for homeowners is not all bad. Some courts have already stopped lenders from foreclosing on homes because the companies servicing the loans couldn't prove that they actually owned the loan. This means that it may very well pay homeowners to go to court to stop foreclosures. How these cases will turn out is far from certain. But they may offer a glimmer of hope for anyone who was sold into a loan that they couldn't afford.

by Jim Malmberg

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