New York's Department of Financial Services (DFS) has issued proposed regulations that authorize shared appreciation mortgages (SAMs) to be made to borrowers who are "underwater" on their mortgages. Under a SAM, the mortgage holder agrees to modify the mortgage loan to reduce the mortgage principal in exchange for a share of the home's future appreciation. The proposal would allow a servicer to enter into a SAM on behalf of the mortgage holder.
Under the proposal, to be eligible for modification to a SAM, a mortgage loan would have to:
Be secured by a first lien on real property located in New York that is improved by a one-to-four-family residence or a residential unit in a building that is used or intended to be used as a home or residence
Have a principal balance that exceeds the property's appraised value
Be 90 or more days past due or the subject of an active foreclosure action
Be owed by a mortgagor who is ineligible for various mortgage modification programs (such as the federal Home Affordable Modification Program) or a refinance under the Home Affordable Refinance Program or FHA refinance program
The proposal would limit a mortgage holder's share of appreciation under a SAM to the lesser of the amount of the reduction in principal plus interest, or 50 percent of the appreciation. It would also limit the amount of the principal balance remaining on a mortgage that has been modified in connection with a SAM.
Various disclosure requirements are included as well. The proposal would require certain disclosures to be provided to the borrower at or before accepting an application for a SAM and a notice containing certain disclosures to be provided to the borrower before entering into a SAM agreement. It would also require a SAM agreement to contain a specified legend stating that the borrower is "giving away some of any future appreciation in the value of" the borrower's home.
The proposal specifies the fees that a holder may charge at closing and contains various prohibitions. These prohibitions include that a holder may not enter into a SAM without written documentation that the terms were explained to the borrower by an attorney or HUD-certified counselor, and no prepayment penalty can be charged on prepayment of a mortgage modified in connection with a SAM.
The proposal was published in the New York Register on December 18, 2013, and comments will be received until 45 days thereafter (February 3, 2014).