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The Mortgage Investors Coalition called on the Treasury Department to reject a proposal to offer distressed borrowers interest-only payments for a certain length of time as part of the terms of a Making Home Affordable Modification Program (HAMP) workout.

The coalition said a proposal being formed by large banks to allow borrowers the option to make interest-only payments as part of a new HAMP workout plan fails to address the issue of negative equity. Such a proposal is not in the best interest of the housing industry and consumers, said the coalition, a recently formed trade group of asset managers holding more than $100bn in residential mortgage-backed securitizations (RMBS) on behalf of pension funds, college endowments and other investors.

“Modifying homeowners into mortgages that have future payment increases and adjustable interest rates will not improve a homeowner's situation,” said Micah Green, a partner at Patton Boggs and coalition spokesman. “Doing so would ignore the fact that many of these homeowners are already in interest-only or other non-traditional mortgages and owe more on their mortgage than their home is currently worth.”

The coalition acknowledged the frustration at the lack of successful modifications completed, but said efforts should be focused on long-term solutions.

“The Mortgage Investors Coalition believes any changes to HAMP should focus on refinancing homeowners into long term affordable fixed rate mortgages, so homeowners and the housing market don't have the threat of interest rate resets, balloon payments or large payment shocks in the future that could drive additional foreclosures,” Green said.

Write to Austin Kilgore.