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.
Brilliant!
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.
I recall seeing these ideas mentioned since the the TARP was implemented. I agree that it seems a good idea, and wonder why it hasn’t seemed to have caught on in a big way. Just my opinion, but I think that the lender should be entitled to a much larger share of future appreciation, say 50%-60%, but then maybe 40%-50% share to the debtor and forgiveness of a huge chunk of debt is just not enough incentive to pay their reduced mortgage.
I do have a problem with the lender not receiving 100% of the future appreciation. The lender could provide some other “incentives” to the borrower for paying mortgage on time. Am I missing something? Just imagine the same approach applied to stock or bonds investors. Lets, say, I used margin and “invested” in SPY; then I lost 50%. Would the broker make a deal with me that they forgive me what I borrowed on margin? For me that deal is just another bad lesson for the public. It doesn’t teach anybody to be responsible with their debt. It sends a message to the public that it is ok to be reckless with somebody else’s money!
The one BIG difference here between the housing situation and the stock/bond example is the complicit involvement by the lenders who created an impossible situation. It was all about creating volume of loans, irregardless of quality, so they could be packaged and sold to unsuspecting investors at a nice profit. The banks know this, and this is why you are beginning to hear about settlements and ways to resolve, like Ocwen’s creative approach. Believe me, if they didn’t feel they were at fault, they wouldn’t be agreeing to any solutions.