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MORTGAGE HELL….Sheila Bair, head of the FDIC, is working on a plan to help homeowners stuck with mortgages they can’t afford. One problem she faces is that any plan that helps genuinely distressed homeowners would almost certainly help plenty of others who just feel like lowering their payment terms. But even if we grit our teeth and accept that, there’s another problem:

Renegotiating troubled mortgages — as opposed to paying them off — is difficult because most have been packaged into securities and sold off to multiple investors. Mortgage servicers — companies that collect payments and work with homeowners — typically act on behalf of those investors, who often have competing interests. Getting servicers to rework mortgages has been a tough slog for the government under its existing programs, which encouraged but didn’t require industry compliance.

Ms. Bair’s proposal is designed to overcome some of these problems by significantly raising servicers’ incentives to cooperate. The government would agree to share a portion of any losses on a new, more-affordable mortgage, should it go into default.

I suspect that this consideration was behind John McCain’s plan to buy up mortgages at face value and replace them with new, cheaper mortgages. This may be a windfall for investors, but it also probably means that you don’t have to negotiate a separate agreement with all the noteholders who own a piece of the securities. The terms of most (though not all) mortgages allow them to be repaid at face value at any time, which means you don’t have to get the approval of all the noteholders to do so.

At least, that’s my guess. It would be nice to read a definitive explanation of how all this works and what the problems are with renegotiating sliced-and-diced mortgages, but I haven’t seen one yet. If anybody comes across something authoritative, let me know.

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