A new loan modification program cuts the outstanding loan principal in exchange for an equity interest given to investors.
The program, announced Tuesday by Ocwen Financial Corp., reduces outstanding principal on the mortgage to 95 percent of the home’s current market value. The written-down portion is broken into three adjustments applied over three years if the borrower remains current.
Ocwen, which reports a $74 billion residential servicing portfolio, said that delinquent borrowers in 33 states are eligible.
The program was originally launched as a pilot in August 2010, with 79 percent of borrowers accepting the plan and only 2.63 percent re-defaulting.
According to the Atlanta-based servicer, the program addresses higher defaults among borrowers with loan-to-value ratios in excess of 100 percent without providing fully capable borrowers with an incentive to default.
Dubbed the shared appreciation modification, or SAM, investors earn 25 percent of any appreciation up until the time the property is sold or refinanced. Borrowers keep 75 percent of the increased equity.
“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 Chief Executive Officer Ronald Faris said in the news release.
Executives from HomeFree-USA and the National Community Reinvestment Coalition were quoted in the announcement praising the program.
