Ocwen Financial Corporation has launched a new loan modification program designed to help distressed homeowners who owe more than their houses are worth and, at the same time, mitigate the likelihood of "rewarding" borrower delinquency. Ocwen's Shared Appreciation Modification (SAM) program reduces delinquent customers' principal owed, but also compels them to share some of the appreciation with the mortgage's owner, not the servicer, if the house increases in value by the time they sell or refinance it. Ocwen launched the SAM program on a pilot basis last year.
With a SAM, the principal of the loan is written down to 95 percent of the current market value of the home. The written-down portion is forgiven in one-third increments over the next three years, so long as the homeowner stays current on the modified mortgage. When the house is later sold or refinanced, the borrower must share 25 percent of the appreciation with the investors that own the loan as the borrowers keep 75 percent of the gain.
"Like all modifications, SAMs help homeowners avoid foreclosure. But they also restore equity. That's a significant benefit to the customer and, we believe, the economy and housing market," said Ocwen Financial Corporation Chief Executive Officer Ronald Faris. "Psychologically, it's important too. 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."
"The results of our initial pilot were extremely positive—79 percent borrower acceptance rate with only 2.63 percent redefaults," said Faris. "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."
Ocwen currently has a $74 billion residential servicing portfolio and is expanding as financial institutions exit the servicing market. Last year, Ocwen acquired the HomEq servicing business from Barclays Bank and earlier this year Ocwen announced it reached agreement to acquire Litton Loan Servicing from Goldman Sachs for approximately $264 million.
