The New York Department of Financial Services (DFS), in accordance with Section 6-F of the New York Banking Law, recently adopted regulations authorizing shared mortgage appreciation modifications in limited circumstances.
More specifically, first mortgages on residential property are eligible for a shared appreciation modification if the unpaid principal balance exceeds the property’s appraised value based on an appraisal report prepared no more than 150 days before the execution of the modification agreement. Junior mortgages on residential property are also eligible for shared appreciation modifications under the same criteria. Further, if the lender holds both the senior and junior mortgages, the total mortgage debt is also eligible for a shared mortgage appreciation under these criteria.
Next, the mortgage loan must be at least 60 days delinquent or the subject of an active foreclosure. Lastly, the holder of the loan must have disclosed potential modification alternatives to the borrower, including the Home Affordable Modification Program (HAMP), prior to the borrower electing to proceed with the shared appreciation modification. The regulations also require the holder to provide a conspicuous notice before entering into the shared appreciation mortgage warning the borrower that, among other things, “he agree[s] to give away a part of any future increase in the value of your home.”
If the above criteria are met, then the modification may authorize the lender to share in the property’s appreciation “in the event of a sale or transfer of the Residential Property or any interest therein.” The regulations establish a specific formula to calculate the lender’s share of the appreciation in value.
While we commend the DFS for its creativity in crafting this program, the amount of disclosure required by the regulations fails to strike the right balance. We believe that as distressed properties recover prior value, the regulations will be exploited by the consumers’ bar to attempt to invalidate these agreements.