Distinctive features related to principal forgiveness in an unusual modification program Ocwen recently started could improve efforts made to resolve underwater loans in securitizations, according to a Moody's Investors Service report Monday.
Ocwen's program, which also has a novel shared appreciation component, is unusual in the hierarchy of the modification options in that it offers principal forgiveness first ahead of interest rate modifications and other adjustments, said Amita Shrivastava, vice president-senior credit officer at Moody's.
Also among the factors that make the Ocwen program distinctive is the fact that “there is no limit to the LTV” that it can be applied to, as long as the net present value calculation shows it is a better alternative than foreclosure if Ocwen pursues the modification, Gene Berman, assistant vice president-analyst at Moody's, told this publication.
Berman said this is “a little unusual, there is usually a limit in terms of the principal forgiven” in most modification programs. Twenty-eight percent of the loans in Ocwen's portfolio have LTVs greater than 135%. This is the largest concentration of LTVs in the portfolio, according to Moody's. However, the next largest concentration of LTVs based on loan count (18%) is in loans with LTVs lower than 85%.
In addition to the NPV test, there are other criteria in determining which loans Ocwen will apply its unusual modification program to. “DTI's also a driving factor in determining principal forgiveness” in Ocwen's program, Shrivastava said in an interview.
While the shared appreciation component is unique in a modification context, Berman said its immediate benefit would likely be “marginal” given the relative lack of appreciation generally persisting in the market. But there could be a little bit of psychological advantage “in that the borrower is bringing something else to the table that they don't through other programs.”