Banks and Mortgage Servicers May Share Home Appreciation with Troubled Borrowers
Thursday, July 31, 2014 -
Last month, New York Department of Financial Services finalized and enacted Banking Law Article 6-f, which permits banks and mortgage servicers to exchange a reduction in outstanding principal for a share of the future increase of homes value. Wha-wha-what? Yes! Lenders licensed to make residential mortgage loans in the state of New York are permitted to receive a share in the future appreciation of the property serving as a security for the loan.
Section 6-f provides that a Holder may enter into a written agreement with a Mortgagor under which the Holder conditionally reduces an amount of principal of the then outstanding Mortgage Loan in order to assist a Mortgagor who may be at risk of foreclosure. The written agreement may permit the Holder to share in the appreciation of the market value of the Residential Property securing such loan.
Eligible borrowers must:
- mortgage loan is either a first lien mortgage, junior lien, or a combination of these with unpaid principal balance exceeds the appraised value or the residential property performed within 5 months, 150 days before execution of the agreement
- the borrower is at least 60 days delinquent, or the mortgage is under foreclosure proceedings
- the lender has assessed the borrowers eligibility to enter into HAMP, HAMP or any other modification offered by the Government Sponsored Enterprises, a modification offered by the FHA, a proprietary modification, or traditional refinance, streamlined refinance r refinance under the HARP and the FHA refinance program. Furthermore, the borrower has elected to enter into a Shared Appreciation Agreement after having received disclosures that that set the terms of the transaction in plain terms, and provide at least the following information:
- amounts the borrower must pay to the holder before or in tandem with the execution of the agreement or modification
- the events that would terminate the borrowers obligations under the Shared Appreciation Agreement, and explicitly warn him/her about the consequences of defaulting
- a full explanation of how the unpaid balance on the pre-agreement loan is calculated, breakdown and kist all third party fees, taxes and insurance advances
- the monthly payment, escrow amount for taxes and insurance, amortization period. If the payments will change during the term of the loan, provide examples of the impact the increased payments may have
- statement that the Share Appreciation Agreement requires the maintenance of an escrow account, and an explanation of this requirements
- interest rate, and if it applies, a statement of interest rate changes and the indexes to which the rates are tied
- a statement that the loan may be prepaid prior to final maturity without penalty. The lender must specify the borrowers repayment obligation in the Shared Appreciation Agreement
- the lenders toll free number and contact to whom the borrower can reach out with questions, comments and complaints
- a notice that he/she can submit written complaints to the New Yorks Department of Financial Services online at ( http://www.dfs.ny.gov/consumer/fileacomplaint.htm )
- if it applies, that the borrower is eligible to enter into a modification or refinance transaction, which may also result in a lower monthly payment than the current one, without having to share in the appreciation of the value of the residential property. This disclosure must include the amount of the lower monthly payments and any other material terms.
Here is an outline of the clauses and components of the rule:
- Scope and application
- Definition of terms
- Eligibility Requirements for Shared Appreciation Mortgage Modifications
- Calculation of Unpaid Balance
- Sharing of Appreciation in Value
- Calculation of Holders Share of Appreciation
- Statement on Shared Appreciation Agreement
- Loss Mitigation Notification
- Fees, Charges and Interest Rate
Wait, wait... i know you are probably running off to discuss this with your lawyers, compliance department, and your branch in New York. I just wanted to applaud this initiative. I think this rule will set the beginning of a whole new way of lending. OK, off you go... see you on Broadway...
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