One of the biggest problems banks have in recasting mortgage loans is the accounting loss they will take from allowing a borrower to
repay a loan at less than a full amount. If this hurdle can be overcome, the banks will be more likely to participate.
A borrower who is in foreclosure, or at risk of foreclosure, who can afford to keep his house if his mortgage payments were reduced, approaches the bank for assistance. The bank agrees to reduce the borrower’s mortgage payment and mortgage amount to a level that is affordable. For instance,the bank might agree to a $75,000 reduction, reducing a $275,000 mortgage to $200,000, with a corresponding reduction in payment of approximately $330 per month.
In exchange for reducing the mortgage amount by $75,000, the bank receives a $75,000 payment from the Federal
Mortgage Recovery Funds.This $75,000 payment comes with some conditions attached.
The bank is able to use 100% of this money, $75,000 in this case, must be invested by the bank into a fund managed by a quality nonprofit organization (the cd.mac) which will be used to create affordable housing and jobs. The money becomes an invested asset for the bank. From the accounting perspective, the bank is able to take the entire $75,000. As an asset on its books, removing the problem of recognizing an accounting loss.