A new report from the Center for American Progress sets it sites on Fannie Mae and Freddie Mac as it urges the FHFA to consider a principal reduction pilot program for the mortgage giants that uses shared appreciation modifications—where principal is written down on deeply underwater loans in exchange for a portion of the future appreciation on the home.
The report specifically cites a recent Shelterforce interview with Ocwen Financial CEO Ron Faris, who discussed the lender’s shared appreciation modification program.
The idea that a shared appreication mortgage, or SAM, is a sensible workout instrument is not a new idea, but we're now seeing signs that it might be gaining some traction. In his interview, Faris, in no uncertain terms, makes clear that SAMs make financial sense to investors, the lenders, and most important, the homeowner:
“In the SAM program, we incentivize the borrower to continue to make their payments by saying, 'Look, you only get this principal reduction on a permanent basis if you continue to make your payments. And you will get a third of the reduction in each of the first three years if you continue to make your payments.' Investors were much more willing to accept something like that for two reasons. One, they felt that it was motivation for the borrower. And they realized that, if a borrower defaulted early on, that they weren’t giving up as much principal.
More, Sen. Robert Menendez of New Jersey, who chairs U.S. Senate Bank Committee's subcommittee on Housing, Transportation, and Community Development is promoting legislation that, in the face of FHFA resistence to the idea of principal reductions, makes shared appreciation mortgages more globally available by incetivizing lenders.