Meaningful principal reduction used to be an urban legend compounded by scamsters.
And until recently, Florida homeowners were probably more likely to spot Bigfoot than find a lender willing to forgive a significant portion of their residential first mortgage through a loan modification. But earlier this month, Ocwen Financial Corp. became one of the first private companies to initiate principal reduction without the prodding of a government agency.
Through the program called Shared Appreciation Modification (SAM), Ocwen is writing 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,” said Ocwen CEO Ronald Faris. “That’s a significant benefit to the customer and, we believe, the economy and housing market. Psychologically, it’s important too. 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.”
Ocwen said 79% of the borrowers have accepted the offer with a re-default rate of 2.6%. Ocwen said it has regulatory clearance to push the program into 33 states. Since the start of the mortgage crisis, Ocwen has saved over 200,000 homes from foreclosure and produced 25 times as many modifications per loan serviced as the servicing industry overall, the company claims.
“The simplicity and rationale of the SAM is striking: the homeowner maintains the equity that would otherwise be lost in the foreclosure process, and servicers and investors maintain a performing asset,” John Taylor, President and CEO of the National Community Reinvestment Coalition, said. “Ocwen has found a way to align the interests of borrowers, servicers and investors, making the program a win-win for all involved.”
Oppenheim Law hopes this is the beginning of a trend that was supposed to start three years ago when the government promised that it would assist in modifying more than 4 million loans.