This summer, mortgage servicer Ocwen Financial Corp. officially launched a mortgage principal reduction program for homeowners with negative equity — one of the first programs conducted without the help of a government agency.
With the Shared Appreciation Modification program, Ocwen will write down loan principal to 95 percent of a home’s current market value. The write-down is forgiven in one-third increments over a three-year span, “so long as the homeowner stays current on the modified mortgage,” according to an Ocwen news release. If and when the house is sold or refinanced, the borrower holds on to 75 percent of the appreciation; the remaining 25 percent goes to the investors who own the loan. Other servicers have sporadically used Hardest Hit Fund and Home Affordable Modification Program dollars to subsidize principal write-downs, but this is a first-of-its-kind effort.
Over the past few years the principal reduction drumbeat played by advocates has grown ever louder. The New Bottom Line has made principal reduction for all underwater loans one of its goals. Clearly Ocwen, which is no charity, believes what advocates have been saying for a long time: when you take a clear-eyed look at the situation, principal reduction is the route to real loss mitigation.
But with the GSEs recently insisting they will not write down principal, it’s unclear how long it will take before principal reduction programs of any sort become an industry-wide standard. While waiting for an answer, underwater borrowers will have no choice but to hold their breath.