Realty Check

Rewards to Stop Mortgage Walkaways?

I'm going to admit something here: I received a release from Loan Value Group earlier this week regarding a new program they were launching for underwater borrowers, and I almost deleted it because I thought it was just some gimmick. But with all the snow swirling around my office windows and the real possibility that a lunchtime walk could result in an early burial, I started going back through my "in box" to see if there was anything worth chatting about.

And then I really read the release.

LVG, which is a mortgage consultancy, is behind a program that would give future cash rewards to underwater borrowers who don't voluntarily walk away from their mortgage commitments.

It's called the "Responsible Homeowner Reward," and it's kind of a way around principal reduction, which happens to be getting more chatter these days. The payments would be on average less than $10,000, but LVG believes this is enough to keep borrowers from becoming "walkaways."

We've talked plenty on the blog about walkaways or "strategic defaults" or whatever the industry chooses to call them next. There are supposedly around 10 million homes in the U.S. with "substantial negative equity," according to LVG. That's about $2 trillion in mortgage debt. LVG's release says the program, "is being launched with one of the largest investors in consumer and mortgage debt in the U.S. The client, who has asked for anonymity during the rollout phase, has purchased and sold over $5 billion of debt since 2008." You make the guess.

LVG will work with owners of risk to target the borrowers who they deem at greatest risk of walking away from their loan commitments. LVG also claims that the total cost of the RH Reward "is is substantially less than the overall cost of a foreclosure, principal reduction, or loan sale. Additionally, if the borrower subsequently defaults (or re-defaults), the Reward is never paid, costing the loan owner nothing."

So who gets how much in reward?

Well apparently, "The overall structure and execution of the program, including the customized size of each individual Reward, was designed by industry leaders in behavioral economic theory, consumer marketing, and mortgage finance."

Behavioral economic theory: Like who's irresponsible and who's not? (I had to fight to keep from writing deadbeat...oops! There I go again...)

Look, we all know that some borrowers consider their home to be an investment-gone-bad that should simply be dumped. There's a good argument there. Others consider they were defrauded and therefore feel no obligation to their lenders. I'm caught between more annoyance that we're now supposed to "reward" borrowers for paying their mortgages and skepticism that the reward is really going to make much of a difference to a borrower who is unlikely to see any equity in their home for a decade.


Questions?  Comments?