Ocwen Financial Corp. is again helping itself financially by cutting distressed homeowners an unusual break.
The West Palm Beach, Fla., servicer has expanded a program offering shared appreciation loan modifications, in which the mortgage holder reduces a borrower's principal in exchange for a percentage of future appreciation. The idea has been around for some time. Most servicers have failed to persuade the largest banks and investors to reduce principal because of the potential for fraud and moral hazard.
"Nobody wanted to be the first to introduce the idea that it was okay to default on your mortgage and get your principal cut," says Jim Riccitelli, the co-CEO of Real Estate Equity Exchange Inc., a San Francisco company that pioneered the idea.
The benefit is that "you could clean these loans up, not push people into foreclosure, and you'd have lots of public relations ammunition too because you'd be keeping borrowers in their homes," Riccitelli says. "Nobody wanted to adopt it. Ocwen has been willing to try things that some of the other servicers wouldn't try."
That willingness doesn't necessarily reflect altruism on Ocwen's part. The read among industry executives is that Ocwen's motivation for expanding the program is to quickly get itself reimbursed for servicing advances.
Ocwen's pending purchase of Litton Loan Servicing from Goldman Sachs Group Inc., expected to close by Nov. 1, will only compound its problem of fronting principal and interest payments to investors, along with property taxes and insurance premiums. Litton has advanced about $2.5 billion to owners of delinquent mortgages it services.
Servicers get reimbursed for advances when a loan is modified or the home goes into foreclosure. This may help explain why, though most shared-appreciation programs target underwater borrowers who are still paying their mortgages, Ocwen's is specifically aimed at borrowers who have defaulted.
Paul Koches, an executive vice president at Ocwen, acknowledges that "any resolution would typically result in recovery of the advances by the servicer." But he says principal reduction is a powerful incentive for borrowers to cure their defaults. "If there's no hope perceived on the part of the homeowner to ever regain equity on the home, it undercuts the motivation to ever make payments."
Whatever its aims, Ocwen scored a public relations coup by winning over the National Community Reinvestment Coalition, once a vocal critic of the subprime special servicer in West Palm Beach, Fla.
"It's been a big change between 2004 and today," says John Taylor, president and CEO of the Washington advocacy group. "We were quite critical and they began implementing changes and doing more outreach to the point where they shifted from someone we were highly critical of, to being one of the better servicers."
Ocwen isn't giving his group money, Taylor says. "They aren't paying us. We don't have any contract or program funding from them."
Under Ocwen's plan, the principal on a loan would be written down to 95% of the home's current market value. That written-down portion would be forgiven in one-third increments over three years as long as the homeowner continued to pay the modified loan. When the house got sold or refinanced, the borrower would keep 75% of the appreciation and share 25% with investors.
Nearly 80% of 1,000 defaulted underwater borrowers in several states who were offered the shared-appreciation modification participated in a pilot program in August. Ocwen said it received "regulatory clearance" to make the program available to qualified customers in 33 states. (It did not identify the regulator, but Ocwen is one of four Home Affordable Modification Program servicers that the Treasury Department required to make substantial improvements.)
Taylor says he doesn't care how Ocwen recoups its advances, as long as borrowers were being helped.
"The traditional way for servicers to collect advances is to go to foreclosure," Taylor said. "This actually keeps the homeowner in their home whether they collect their fees on top of that. If you can collect your fees this way and keep the borrower in the home, that's far better than foreclosure."