Ocwen Financial Corp. launched a new modification program to reduce the principal on a mortgage for delinquent borrowers, while compelling them to share in the future appreciation of the home’s value with the investor.
Mortgage modifications will only be available for homeowners in negative equity.
Atlanta-based Ocwen holds a $74 billion servicing portfolio after acquiring Litton Loan Servicing and HomEq. Ocwen launched the Shared Appreciation Modification program as a pilot in August 2010, a program the company believes will make a major dent in the roughly 14 million mortgages currently in negative equity, according to Moody’s Analytics.
Through the program, Ocwen will write down qualified loans to 95% of the underlying property’s market value. The amount written down is forgiven in one-third increments over three years as long as the homeowner remains current. When the house is later sold or refinanced, the borrower will be required to share 25% of the appreciated value with the investor.
“Like all modifications, SAMs help homeowners avoid foreclosure. But they also restore equity. That’s a significant benefit to the customer and, we believe, the economy and housing market. Psychologically, it’s important too,” said Ocwen CEO Ronald Faris. “Our analytics tell us that an underwater mortgage is one-and-a-half to two-times more likely to default than one with at least some positive equity.”
SAM is one of the first principal reduction programs initiated by a private company without the prodding of a government agency. Other servicers have sporadically used Hardest Hit Fund and Home Affordable Modification Program dollars to write down principal, but only in select states.
Since August, Ocwen said 79% of the borrowers accepted the offer with a redefault rate of 2.6%. Ocwen said it has regulatory clearance to push the program into 33 states.
J.T. Smith, the chief investment officer for the boutique investment bank Aristar Funding Group said there are many still unknown parts of how Ocwen will structure the modifications such as tax liens and future title issues, but granting the borrower 75% of the appreciation is “very generous.”
“This program is a win for the borrower and very, very generous of Ocwen and investors,” Smith said. “Silent seconds are a more equitable solution, so Ocwen borrowers should take these modifications and run with it.”