Ocwen Financial Corp. has initiated an equity-sharing loan modification program designed to assist underwater borrowers.
Under the Shared Appreciation Modification (SAM) program, which Ocwen began piloting last August, the principal of a delinquent loan is written down to 95% of the current market value of the home. The written-down portion is forgiven in one-third increments over the next three years, provided the borrower stays current on his or her mortgage. When the house is later sold or refinanced, the borrower must share 25% of the appreciation with the investors that own the loan.
The equity-restoration aspect is significant, Ocwen CEO Ronald Faris says, citing company research finding that a borrower in a negative-equity position is up to twice as likely to default on a loan than a borrower with at least some positive equity.
The initial pilot resulted in a 79% borrower acceptance rate and only a 2.63% redefault rate, Faris explains. The company now has regulatory clearance to make the SAM program available to qualified borrowers in 33 states.
‘We think this program can make a real impact on curing the negative-equity problem and are working hard to obtain approvals for SAMs in all jurisdictions,’ he says.
Since the start of the mortgage crisis, Ocwen has produced 25 times as many modifications per loan serviced as the servicing industry overall, the company claims. John Taylor, the National Community Reinvestment Coalition's president and CEO, described the simplicity and rationale of SAM as "striking."
"We hope this innovative effort inspires other mortgage servicers to follow suit, because fixing the housing market is the best way to bring back jobs and revitalize the American economy," Taylor says.
