So the Obama administration is apparently exploring alternate options with regards to preventing 1 Million homeowners avoid foreclosure in the midst of a nasty housing market crisis. The strategy involves encouraging lenders to process loan modifications on delinquent or defaulted home loans, including the reduction of principal on home loans, by bringing new investors into the market.

This proposal to prevent 1 Million Foreclosures is based on a paper released by Jordan Dorchuck <http://www.housingwire.com/tag/wl-ross-co> , James Lockhart <http://en.wikipedia.org/wiki/James_B._Lockhart_III> and Pete Mills, who are the MDs of Mortgage Banking Initiatives Inc. While it’s true that banks have resisted this kind of measure in the past (for overtly obvious reasons), the initiative will apparently be of benefit to all parties involved. Even more amazing, this strategy is not supposed to require a single taxpayer dollar. Skeptical? Well…I can’t say I blame you.

So how is this possible anyway, at least from a theoretical point of view? Among the residential home loan-backed securities <http://en.wikipedia.org/wiki/Security_(finance)> that are outstanding, approximately $1.3 trillion are what are known as private label notes which were issued by lenders and banks, based on information released from the Securities Industry and Financial Markets Association <http://en.wikipedia.org/wiki/Securities_Industry_and_Financial_Markets_Association> (SIFMA). A large number of contracts regulating such securities limit the percentage of loans which can be amended, or forbid the reductions of principal.

As a means to overcome this little hurdle, the U.S. Treasury is being called upon to assist with facilitating the sales of defaulted or delinquent mortgages out of the securities to external investors at a discounted rate. Due to the fact that these investors would be purchasing loans at a level below face value, they will be quite open to renegotiating the relevant terms, including lowering the principal.

The U.S. Treasury would also be required to provide legal cover against lawsuits to the lenders servicing the mortgages, by declaring short-sales <http://en.wikipedia.org/wiki/Short_sale_(real_estate)> to be “qualified loss-mitigation activity” based on legislation introduced in 2009.

So, allegedly, if lenders could simply sell toxic mortgages to strained debt investors, then everyone stands to gain. Banks would net a greater amount of money than they would through the foreclosure process, homeowners would benefit from a lower loan amount and keep their cherished homes, and the debt investor would gain a great deal on a loan that stands a greater chance of performing well.

If all this represents such a rosy picture, why is there a need for legal cover? The investors involved in these deals should be able to connect and modify their respective agreements. However, some of them would most likely not be too happy if their loans were sold to other investors at a loss to themselves. This potentially represents the biggest technical/legal snag in the setting up of the process. The resultant sale price must please both the original investor as well as the investors to follow.

Well, a positive response to the housing market crisis that results in the saving of one million homes without causing any party involved to suffer any kind of loss, sounds a little too good to be true, doesn’t it? Typically when various deals are struck between the big players in the housing market, it’s the average middle-class family that gets screwed over in the process.

I could hardly blame the normal homeowner for harboring a healthy dose of cynicism and guardedness when it comes to developments of this nature. At the end of the day, the proof is in the pudding, and hopefully it doesn’t leave a heck of a sour taste in the mouths of American homeowners.