02/10/2012 By: Carrie Bay, DSNews.com
Sen. Robert Menendez (D-New Jersey) says the $25 billion settlement struck between federal and state officials and the nation’s five largest mortgage servicers “helps homeowners but it’s a long way from healing the grievous wounds left by the crisis.”
Those wounds have been made deeper by the continuing decline in home prices that has put millions of homeowners in the hole on their mortgage, owing far more on their loan than the home is now worth.
Menendez, who is chairman of the Senate’s housing subcommittee, has introduced a bill that he describes as “innovative,” which would encourage lenders to reduce principal for underwater borrowers with a shared-appreciation modification.
Menendez’s Preserving American Homeownership Act would establish a program through which banks would write down the principal balance of the mortgage to 95 percent of the re-assessed value of the home. This reduction would take place over a three-year period in
one-third increments per year, provided the homeowner remains current on their payments.
In exchange, the bank would receive a fixed share – not to exceed 50 percent – of the increase in the home’s value when the home is sold or later refinanced. The percentage of shared appreciation would depend on how much the bank reduces the principal. For example, if the bank reduced the principal by 20 percent, they would receive a 20 percent share of any later increase in the home price.
Homeowners would be eligible for the program no matter how far underwater they are. Homeowners who are in default or foreclosure would also be eligible, but they would be required to make timely payments on the modified mortgage going forward or the principal reduction would be retracted. Only primary residences would qualify for assistance under the program.
“When you owe more than your house is worth through no fault of your own, relief can be hard to come by,” said Sen. Menendez.
“More and more people are choosing to walk away, since they feel that’s their only viable option, which only exacerbates the problem. My bill aims to break this cycle and give homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone,” Menendez added.
The number of homeowners underwater on their mortgage is currently estimated to be more than 10 million, or approximately 22 percent of all homeowners. On average, these homeowners owe anywhere from $40,000 to $65,000 more than their home is currently worth.