Federal Reserve Chairman Ben Bernanke told a House committee Thursday that he supports the general idea of a shared-appreciation mortgage program.
"A useful approach would be reducing principal in an equity sharing way that would flow some of future gains back to the lender," Bernanke said.
Since the housing market collapsed in 2007, more than $7 trillion in equity has been lost, more than half that existed in 2006, according to a Fed white paper released in January.
More than 11 million borrowers owe more on their mortgage than their home is worth, but the vast majority of them remain current on their payments.
Some servicers like Ocwen Financial Corp. (OCN) installed a shared-appreciation program for investors who give clearance. These initiatives are new and would need more time to determine their success.
The Federal Housing Finance Agency will decide whether to allow Fannie Mae and Freddie Mac to participate in a Treasury Department program that would pay the GSEs for some of the principal reduced on the loans they back. FHFA Acting Director Edward DeMarco said in speech earlier in the year that principal forbearance was a form of shared-appreciation, and analysis has found it to be an effective tool.
Servicers are beginning to reduce principal in more modifications. More than 8.5% workouts completed in the fourth quarter contained some write-downs, more than triple the amount one year prior, according to data from the Office of the Comptroller of the Currency.
Bernanke said the Fed has no official stance on principal reduction. Economically, any new program could be beneficial, but success would hinge on "the devil in the details," he said.
"A lot would depend on the criteria," Bernanke said. "It depends very much on the way the principal reduction is structured. There is no doubt there are some situations that it would the most effective method."