Updated: 9:50 a.m. Monday, Aug. 8, 2011
WEST PALM BEACH — Lenders have long resisted cutting loan amounts for struggling homeowners, fearing it would entice more borrowers to default.
But one locally based servicer, Ocwen Financial Corp., believes it has found a solution.
The company is rolling out a new loan modification plan for underwater borrowers that lowers the amount owed on the loan - thus reducing the monthly payment - but asks for a share in the appreciated value when the house is either sold or refinanced.
The kickback to the lender may deter people who can afford to make their payments from defaulting, while giving an incentive to either the lender or investor to modify the loan.
"We think this answers some of the critics who say that by reducing principal, you are rewarding imprudent borrowing behavior," said Ocwen Executive Vice President Paul Koches. "What we see is unprecedented delinquencies, and we're doing our best to resolve them."
Offered in 33 states, including Florida, the plan is available only on loans where it will earn more for either the lender or investor than if the home went into foreclosure.
Called a shared appreciation modification, it's fairly simple on its face.
A home's principal amount is reduced to 95 percent of the current market value. That portion is forgiven in equal amounts over a three-year period as long as the owner stays current on the loan.
When the house is later either sold or refinanced, the homeowner must give the lender 25 percent of the appreciated value of the home.
For example, say the principal balance on a loan is $125,000, but the current value of the home is only $100,000. Ocwen's plan would reduce the balance to $95,000, putting $30,000 in a non-interest-bearing account that will be forgiven over a three-year period.
If the house is later sold for $120,000 - marking an appreciation of $20,000 - the homeowner would get to keep $15,000, while $5,000 would go to the lender. If the home doesn't appreciate, then the sale occurs as it normally would.
Ocwen, which has about 245 employees in its West Palm Beach office, estimates about 53,000 homeowners nationwide will be eligible for the principal reduction program.
The company specializes in servicing the nation's riskiest home loans and has a portfolio of about 460,000 loans. Ocwen's recent acquisition of Litton Loan Servicing will add 250,000 loans to its portfolio.
A test of the new loan modification program that was launched last year found that of borrowers offered the plan, 79 percent accepted it. The default rate has been about 2.6 percent.
"You have folks breaking their necks to make payments on a home where there is no hope in their lifetime of it regaining equity," Koches said. "A homeowner in a negative equity situation is one-and-a-half to two times more likely to go into delinquency."
In Palm Beach County, nearly 43 percent of homes with mortgages were underwater during the first quarter of 2011, according to real estate analysis firm CoreLogic. Nationwide, 23 percent of homes with mortgages were underwater in the same period.
Most home loan modifications result in an interest rate reduction, which can do little in the long run for homeowners who owe more on their loan than their home is worth, said Kathleen Day, spokeswoman for the Center for Responsible Lending.
"We've felt for a long time that unless you do principal write-downs, you really aren't getting at the problem," Day said. "It's in everyone's best interest to keep a credit worthy person in their home."
Diane Thompson, an attorney with the National Consumer Law Center, is optimistic that Ocwen's plan will work for many borrowers. But she has concerns that it isn't enough for people whose home purchase was based on fraudulent appraisals that artificially hiked the value of a home.
"People who were ripped off should get more than shared appreciation or principal write-down," she said.
And whether the nation's largest lenders will follow Ocwen's new model is unknown.
"Ocwen has been out front for years in doing principal reduction modifications, but the other lenders have been slow to follow," Thompson said. "There is always some hope it will catch on