Proposal would modify underwater mortgages in NY
Lenders would get a new incentive to modify New York homeowners' underwater loans, under a proposal to be announced Tuesday by state officials.
Mortgage lenders could reduce the amount owed on the loans, in exchange for the right to share in the sale profits if the homes eventually rise in value, administration officials said. Previously, state regulations didn't allow such arrangements.
The initiative "will help keep more families in their homes and out of foreclosure, while at the same time reducing potential losses for investors," Gov. Andrew M. Cuomo said in a statement. "That's good for homeowners, good for local neighborhoods, and good for the long-term strength of the housing market."
Under current federal rules, the majority of home loans in New York would not qualify for the program, because Fannie Mae and Freddie Mac -- the mortgage giants that buy roughly two-thirds of home loans in the state -- do not forgive outstanding mortgage balances.
However, the U.S. Senate is expected to vote as soon as Tuesday on a nominee to head the regulator overseeing the mortgage giants. The nominee, Mel Watt, is reportedly open to the idea of forgiving portions of mortgage principal.
The proposed state program would be open to homeowners owing more than their homes' value, and who have been turned down for loan modification. Banks would be required to make clear disclosures to homeowners about terms of the modified loans, and banks' share of profits would be limited to either half the gain in home value, or the total amount forgiven, whichever is less, said Benjamin Lawsky, superintendent of the state Department of Financial Services.
Reactions to the proposal were mixed Monday.
"If the homeowners could get out from being underwater it would give them a wonderful incentive . . . to keep paying their mortgage," Karen Ferrare, an attorney in Westbury who works with homeowners in foreclosure.
However, an economist who has studied "shared appreciation mortgages" said the proposal faces stumbling blocks. It's unlikely that banks would embark on such a program if it is not adopted nationwide, with many changes to federal and state rules, said Andrew Caplin, a New York University professor of economics. And it's unclear whether loan modifications would result in higher taxes for homeowners, he said.
The program would apply primarily to loans serviced by banks, not mortgage banks, since mortgage banks typically do not hold loans on their own books and do not have enough capital to buy the loans back, said Michael McHugh, chairman of the Empire State Mortgage Bankers Association and chief executive of Continental Home Loans in Melville.
Getting a loan reduction "would be helpful," said Victor Alexander Osorio, who said he owes $360,000 on his primary mortgage on a Baldwin home that he estimates is worth less than $310,000. But he expressed reluctance at giving up price appreciation to banks that got government bailouts during the financial crisis.More details about the proposed change will be posted at www.dfs.ny.gov. The proposal will be open for public comment for 45 days.