A proposed bill from Sen. Bob Menendez, D-N.J., would allow underwater borrowers to reduce their loan principal through a federal shared-mortgage-appreciation program.

The Senate bill announced Thursday would give lenders a stake in the equity of the home, receiving a fixed share of the increase in home value when later sold or refinanced.

The shared-appreciation modifications would go through two "pilot programs" for two years at the Federal Housing Administration and the Federal Housing Finance Agency. The bill only applies to loans backed by the FHA or securitized by Fannie Mae or Freddie Mac.

It's not known when the bill will reach the Senate floor, according to a spokeswoman in Menendez's office.

"When you owe more than your house is worth through no fault of your own, relief can be hard to come by," Menendez said in a news release. "My bill aims to break this cycle by giving homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone."

Homeowners in the program would reduce their mortgage principal to 95% of the home's reassessed value, as determined by an independent appraiser. The principal would lower to its new value by a third each year for three years, as long as the homeowner makes payments.

The lender would get a fixed share in the equity of the home depending on how much they reduce the principal, with a maximum of 50%. Capital improvements later made to the home do not apply.

Only primary residences would qualify. The bill also places no underwater limit for homeowners.

The program mirrors one in place since last summer at Ocwen Financial Corp. (OCN), the largest subprime mortgage servicer in the country.