Borrowers will likely stay current on their mortgage after a principal write-down whether they share future equity returns with the bank or not, according to new shared appreciation program data.
Select borrowers can receive a principal reduction from Ocwen Financial Corp. (OCN) back above water over three years but must agree to share 25% of the appreciated value after that time through a program the subprime servicer launched last summer.
Roughly 12.6% of the roughly 20,000 borrowers who took advantage of the program redefaulted within 12 months according to a report Morningstar Credit Ratings released this week.
That is above the 10% redefault rate for Home Affordable Modification Program workouts, but below the nearly 16% rate on private modifications.
A report this summer from Laurie Goodman at Amherst Securities showed borrowers who received a principal reduction in 2011 redefaulted at a 12% rate within in the first 12 months.
That's right on par with Ocwen's program, and the bank or investor gets some of the equity back.
Ocwen has faced much criticism from community groups and borrowers after the foreclosure crisis struck. Just 853 of its more than 5,000 employees live in the U.S. with the rest in India and Uruguay, and many borrowers complain of paperwork labyrinths and call center runarounds.
But Morningstar analysts visited the sites both stateside and abroad and claim the largest servicer of subprime mortgages is coming up with new ways to reach borrowers. After 30 days of collection calls Ocwen will send a DVD to borrowers explaining how to apply for HAMP.
Over the past 12 months, just 24% of its HAMP solicitations came back, a signal borrowers have become fatigued with the array of existing programs and spurring home retention executives to get creative.
"Ocwen's homeownership retention efforts, in our view, are both innovative and highly successful based on their performance metrics," Morningstar said. "The low re-default rates over time are further indication that this program is highly effective."