Principal reduction among suggestions by state task force
Recommendations from the state's newest foreclosure task force include a form of principal reduction, an expansion to foreclosure mediation and tax incentives for foreclosure purchasers -- among many other suggestions.
Here's the report, and here's my story on the subject. The bottom line is that some of the suggestions are for new laws, but most aren't -- they're "best practice" recommendations that the state hopes to encourage mortgage servicers to follow. (The Maryland Bankers Association, which sat on the task force, says members are interested in giving the ideas a try.)
The task force suggested an option for court-supervised mediation before a foreclosure case is filed — if both the homeowner and servicer agree — because the further behind a borrower gets, the harder it is to work out a loan modification or other foreclosure alternative. Currently, homeowners can require their servicer to show up for mediation, but only after foreclosure proceedings begin.
A "Neighborhood Conservation Tax Credit" recommended by the task force would try to counteract vacancy problems by offering an incentive for people to buy a foreclosure and move in. The task force suggests state legislation that would give local governments the ability to create property tax credits for use in communities that need the assistance.
The principal-reduction idea is on the "best practices" side of the scale, something that wouldn't be mandated by law. The task force suggests reducing mortgage principal for borrowers whose home values have dropped below the amount they owe, but not in a one-fell-swoop way. Here's the suggestion:
The task force calls it the "shared equity model" and lays it out like this. The mortgage holder modifies the principal balance so it is 5 percent below the actual market value, putting the sliced-off amount into what amounts to a "silent" second loan -- no interest accrues, no monthly payments are due.
Every three years, one-third of the second loan is forgiven. So it's all gone after nine years.
If you sell or refinance during those nine years, "the investor shares in the equity above the total first and second lien payoff," the task force suggests. The percentage of equity-sharing would decrease every three years "and would be capped at some percentage of the total amount."
This is basically what Ocwen Financial is trying. Maryland regulators say Ocwen hasn't yet launched the program here, but they're eager for that to happen -- for other servicers to give it a go, too.