New York Proposes Shared Appreciation Mortgages For Underwater Borrowers

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On December 10, the New York Department of Financial Services (DFS) proposed regulations that would authorize and encourage “shared appreciation” mortgage modifications in that state. The DFS explained that under a shared appreciation modification, banks and mortgage servicers reduce the amount of principal outstanding on a borrower’s mortgage in exchange for a share of the future increase in the value of the home. The program would be limited to borrowers who are 90 or more days past due on their loan, or whose loan is the subject of an active foreclosure action, and who are not eligible for existing federal and private foreclosure prevention programs. The proposed regulations detail the method for calculating a holder’s share of the appreciation, and limit the share to the lesser of: (i) the amount of the reduction in principal, plus interest; or (ii) 50% of the amount of appreciation in market value. In addition, banks and servicers would be required to provide specific disclosures to borrowers about the terms and nature of the shared appreciation mortgage modification. The proposed regulations also: (i) specify allowable fees, charges, and interest rates; (ii) detail the calculation of unpaid principal balance and debt-to-income ratio; and (iii) list certain prohibitions, including, among others, that the holder cannot require the borrower to waive any legal claims or defenses as a condition to obtaining shared appreciation modification.