I read an article that appeared in Saturday’s Washington Post by Kenneth Harney titled, “Throwing out a lifeline to underwater borrowers“. The article was about a national mortgage lender, Ocwen Financial, one of the largest servicers of distressed loans.
In a nutshell, Ocwen has developed a program that combines principal reduction that resets troubled borrowers’ loans to 5 percent below the property’s appraised value along with a sharing arrangement where Ocwen can recoup some of what was forgiven. Ocwen will write off any losses over a three year period and if a house is sold during the program they will get 25% of any future gains. All the borrower has to do is stay current on the loan, and if the property increases in value, both the borrower and Ocwen stand to gain in tandem.
It’s the type of program I have been advocating for and it’s great to see someone of Ocwen’s stature take the steps necessary to help fix the housing epidemic.
Critics will say it just puts off the inevitable; default and foreclosure. But, according to the article, Ocwen started a pilot program involving more than 3,000 underwater borrowers last year and those who signed up have a “re-default” rate of just 2.6% – WAY below some other programs that have come up short.
A key here is that shared appreciation component; it’s really like a partnership. Ocwen isn’t getting greedy; they get 1/4 of any profits if the house is sold, and why shouldn’t they? If they are willing to take a hit on the principal side of it, they should share in any gains.
I have to say this is the best modification program I have seen yet – by far. Too many lenders have refused to lower the principal balance, only prolonging the inevitable. This should be seen as a model for the future.
I’ve done plenty of bashing of big lenders, but Ocwen gets a hats off from me here. I only hope other lenders get as creative; it could have a huge impact on both the housing market and our overall economic recovery.