How did you develop the shared appreciation modification program and how does it work?
Well, as we talked about before, to adequately deal with the underwater mortgage problem – which according to published statistics affects about 11 million families in the U.S.—we realize that you’ve got to include principal reduction for long-term sustainability. We also needed to address the issue of investors not always being happy that principal’s being forgiven.
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.
And then the last piece was to add in, “Oh, and by the way, if the property value goes back up, we’ll let the investor share that upside. Not all of it, but some of it.” And the investors really liked that. [See Uncle Sam Outdone by Ocwen’s SAM, SF #167.]
And so when you had both advocacy people, who really were speaking for the consumer, and the investors saying, “OK, well, this sounds good, it doesn’t sound like anything we would object to,” it really became our preferred way to do a modification.
We of course wanted to make sure that this type of modification program was compliant with various state laws and regulations. We designed it, for example, to make sure any shared appreciation piece would be compliant with state usury laws. We also spent a lot of time researching things like disclosures to be included in the mod documents. In some states the regulators have said, “Look, we have no objection to it, and we actually like it, but we would first need to have a specific regulation in place covering this type of program, so let us try to work to get that done.” We’ve been able to roll it out in 34 or 35 states, maybe even a few more now, and we are working with regulators in the other states to obtain their blessing.
Is this going to be the way you do principal reductions from now on?
Yes. It really is only not done that way if it’s in a state where we don’t feel we have explicit authority to do it. Or if we’ve already done one. You get one shot at a principal-type reduction and a shared appreciation, and if you, unfortunately, can’t make it there, doesn’t mean that we won’t still work with you, but you’re probably not going to get another one of those.
What happens when the modification doesn’t work? Do you have a set of next steps, Plan B, Plan C?
Well, in most cases, Plan B is figure out, well, has something changed? I mean, really, why didn’t this work the first time? Did we not underwrite it correctly? Did the borrower’s circumstances change? Or did the borrower just sort of not live up to obligations that they probably could live up to if it was a priority?
And if their circumstance change, or if in fact we determine, when we underwrote it, maybe we didn’t take into account certain things that we should have, then we have no problem looking at a second modification. Now, if it’s a case where they’re just not acting responsibly, well then that’s a different story. Those people either are going to have to step up and try to reinstate, or they may ultimately be the one that loses their home.
Right. So for the ones who do want to act responsibly but, because of illness or loss of employment they’re just not going to be able to do a mortgage, you can’t bring it down low enough or there’s no income, what then?
Yes, those are really the hard ones. If somebody doesn’t have any income, or they have very little income, you need to find some other alternative, and that alternative is not going to be homeownership or ongoing homeownership.
Do you encourage or try to do a short sale or deed in lieu before going all the way through foreclosure?
Yes. In fact, we’re trying to roll out a program starting next year that we call our Homeowners One program, where if somebody really can’t make the payments, that we have a little more of a structured response. So we can say, “Look, we want you to help us get you a short sale. We want to work with you. We want you to know you’re going to be able to stay until at least this date. And we’ll, in fact, give you some relocation funds.”
My problem with the general short sales that are out there is I’m not really sure they’re all in the best interest of the individual. The real estate agents sometimes are just trying to get a commission and trying to tell the people, “Well, look, let’s sell your house, and we’ll do a short sale, and you’ll be better off.” I’m not always sure they’re better off. If they didn’t get any money to help them relocate or if they could have maybe stayed a little bit longer and saved a little bit of money so they’re better able to move, that might have been better than a quick-and-dirty short sale where they get nothing out of it.
So we’re trying to be responsible on the short sale side as well, and trying to go to the next level where it’s a much more, I’ll call it, borrower-friendly program than maybe the industry is using today.