Underwater homeowners in New York state are now eligible for an additional form of mortgage modification intended to help more of them keep their homes, in a development quietly passed in the state.
On July 9, the New York Department of Financial Services adopted regulations that allow for shared appreciation mortgage modifications under certain circumstances. The new regulations were announced in the state’s register and went into effect that day.
The regulations, Section 6-f of New York banking law, state that if a borrower is at the risk of foreclosure due to owing more on their home than it is currently worth, a a lender or mortgage holder may reduce the principal amount of a loan to help the borrower stay in their home.
According to a letter from the DFS sent to New York lenders, the lender or mortgage holder would then be entitled to share in any appreciation of the market value of the property between the effective date of the reduction in the principal amount of the mortgage loan and the date when the property is sold or transferred.
But there are stipulations on the amount of return that the lender can receive under the agreement. The lender is limited to a return whichever of the following amounts is lower:
- The amount of the reduction in principal, plus interest on such amount calculated from the date of the shared appreciation agreement to the date of payment based on a rate that is applicable to the modified mortgage loan
- 50% of the amount of appreciation in value
“Currently, a number of New York homeowners owe more on their mortgage loans than their homes are worth. Meanwhile, foreclosures have soared in recent years. While mortgage modifications have helped many homeowners keep their homes, many other struggling homeowners do not qualify,” Daniel Burstein, executive deputy superintendent of the DFS’s real estate finance division, said in the letter to bankers.
“Recognizing the need to assist struggling borrowers avoid foreclosure, Section 6-f of the Banking Law was intended to provide New York mortgage lenders and borrowers with another tool to help borrowers keep their homes.”
There are also very specific circumstances under which a lender and mortgagee can enter into a shared appreciation agreement.
First, the mortgage loan must be a first or junior lien mortgage loan with an unpaid balance that exceeds the appraised value of the home based on an appraisal report prepared no more than 150 days before the execution of the shared appreciation agreements.
Second, the mortgagee must be more than 60 days delinquent on payments on the mortgage loan and must be the subject of an “active foreclosure action.”
Third, the lender must disclose all other forms of mortgage modification to the mortgagee, including:
- A modification under the federal Home Affordable Modification Program
- A modification offered under the Government Sponsored Enterprises’ HAMP programs or proprietary modification programs, if the loan is owned by the GSE
- A modification offered by the Federal Housing Administration
- A proprietary modification offered by the mortgage holder, including a proprietary mortgage that includes a principal reduction, principal forbearance and/or principal forgiveness feature without a shared appreciation component; or
- Traditional refinance, streamlined refinance or refinance under the Home Affordable Refinance Program and the FHA refinance program.
Additionally, there is a laundry list of disclosures that the mortgage holder must provide to the borrower, including (text taken directly from the regulation; emphasis is verbatim):
Each Shared Appreciation Agreement executed pursuant to the provisions of section 6-f of the Banking Law must contain a conspicuous legend at the top of the agreement printed in at least fourteen-point (14) type, consisting of substantially the following language: “IN THIS AGREEMENT, YOU ARE GIVING AWAY SOME OF ANY FUTURE APPRECIATION IN THE VALUE OF YOUR HOME. PLEASE READ CAREFULLY."
Prior to entering into a Shared Appreciation Agreement a Holder must provide the Mortgagor with a notice with a heading in bold, fourteen-point type stating that “IMPORTANT DISCLOSURES ABOUT THE CONTRACT IN WHICH YOU AGREE TO GIVE AWAY A PART OF ANY FUTURE INCREASE IN VALUE OF YOUR HOME. PLEASE READ CAREFULLY.”
At least three illustrations of how the appreciation will be shared at the time the Mortgagor sells or transfers the property, or pays off the Modified Mortgage Loan at maturity. Such examples to include: (A) no appreciation in the value of the Residential Property; (B) appreciation of 20% percent; and (c) appreciation of 50%
A statement or notice to like effect: YOU SHOULD SEEK INDEPENDENT COUNSELING FROM A LAWYER, A GOVERNMENT APPROVED HOUSING COUNSELING AGENCY OR A TAX ADVISOR REGARDING: THE TRADE-OFF BETWEEN A CURRENT REDUCTION IN THE SIZE OF THE MORTGAGE AND THE PROMISE TO GIVE UP PART OF THE FUTURE INCREASE (APPRECIATION) IN THE VALUE OF YOUR HOME; and THE TAX CONSEQUENCES OF THE PRINCIPAL FORGIVENESS AND SHARED APPRECIATION AGREEMENT.
A list of the names and contact information of at least five government approved housing counseling agencies in the county where the Residential Property is located; provided, however, that if there are fewer than five such counselors in that county, the list may include counselors in one or more neighboring counties.
“Shared appreciation agreements provide lenders with an additional incentive to allow borrowers to stay in their homes,” Burstein added. “At the same time, Section 6-f and Part 83 impose disclosure requirements, and limitations on the amount of appreciation that lenders can share, which serve to guard against abuse of vulnerable New Yorkers.
“The intended result of the law and regulation is that more homeowners will keep their homes and avoid the costly and protracted foreclosure process, lenders will recoup their investment, and local communities will become more stable.”
In a recent Mortgage Banking Update from law firm Ballard Spahr, Justin Angelo writes that the regulations, although well-intended, may not prove to be effective.
“While we commend the DFS for its creativity in crafting this program, the amount of disclosure required by the regulations fails to strike the right balance,” Angelo said. “We believe that as distressed properties recover prior value, the regulations will be exploited by the consumers’ bar to attempt to invalidate these agreements.”