People who fall behind on their mortgage payments have long been between a rock and a hard place. Refinancing at lower rates might help to bail them out. But they can't get a new loan without bringing their payments up to date. And even if they did, the blot on their recent credit record can bar them from qualifying for a refi.

Thats why news that PNC Mortgage Corp. is testing a program that helps delinquent homeowners refinance came as a surprise. Indeed, it seems to us the idea could be a sleeper that could have a wide impact on servicing practices.

The housing finance agencies have provisions for loan modifications, including a rate reduction, but they require that the delinquent payments be recapitalized into a new loan. So the borrower ends up with a lower interest rate but a bigger loan amount. And though the option has been available under agency rifles, not many lenders have been using it actively.

As reported Tuesday by American Banker, the investor and mortgage insurer 'help to pay off the delinquency and to bring escrow up to date under the PNC program; the borrower must also pitch in. Only seriously delinquent but otherwise creditworthy urban borrowers are eligible. Only FHA loans are involved.

Sounds like a sweet deal for borrowers - much sweeter than available under agency guidelines. But it could be good for investors, servicers, and insurers too. Foreclosures are costly; investors and insurers lose money on them, and servicers must bear legal and other expenses while losing servicing fees.

But do the loans remain shaky? PNCs pilot should give an answer. Lenders wffi watch with interest.

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