WASHINGTON — Sen. Robert Menendez wants to let lenders share in future home price increases if they agree to reduce the mortgage principal owed by homeowners today.

Menendez, D-N.J., introduced a bill Thursday to provide shared appreciation in exchange for loan modifications that include principal reduction.

Specifically, the bill calls for a two-year pilot program to be implemented by the Federal Housing Administration and the Federal Housing Finance Agency.

Homeowners who owe more than their houses are worth would be eligible for principal reductions down to 95% of the home's value. The principal reductions would come in increments over a three-year period.

In exchange, the underwater homeowners would give their lenders some of the future increase in the value of their homes. The amount of equity that lenders would receive would increase as they granted larger principal reductions, with a cap of 50%.

Homeowners who are behind on their mortgage payments would be eligible, as long as they made timely payments on their modified mortgages. But owners of second homes and investment properties would not be able to participate.

"When you owe more than your house is worth through no fault of your own, relief can be hard to come by. More and more people are choosing to walk away, since they feel that's their only viable option, which only exacerbates the problem," Menendez said in a press release.

"My bill aims to break this cycle and give homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone."

At a Senate Banking Committee hearing Thursday, Menendez won praise when he asked economist Mark Zandi about his proposal.

"I think that's an excellent idea," Zandi said, noting that some private sector lenders are already using shared appreciation mortgages. "I do think that that is appropriate, that there should be shared appreciation of any principal write-down and perhaps claw-back provisions, too, if homeowners don't execute in the way that they're contracted to do."

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