Private Company Offers Incentives for Underwater Homeowners
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- Kirk Haverkamp | September 14, 2010
A private company is proposing a new approach to keep underwater homeowners from walking away from their mortgages. Pay them to stay current on their loan.
Loan Value Group launched its Responsible Homeowner Reward program last winter. Mortgage investors who sign up for the program authorize the company to offer financial incentives to underwater homeowners to stay current on their mortgages.
The program doesn’t cost the homeowners anything. Instead, the company is betting that investors who own underwater mortgages will be willing to pay a premium to encourage financially stable homeowners to keep paying a mortgage that exceeds what their home is worth, rather than simply cutting their losses and walking away.
The program offers an alternative approach to traditional loan modifications, which seek to restructure a mortgage in order to enable a homeowner to catch up with or remain current on their mortgage payments.
Stay current, earn credits toward mortgage
Homeowners selected for the program are contacted by Loan Value Group with an offer: if they remain current on their mortgage payments, the investors holding their mortgage will write off a certain percentage of what they owe. The full amount gradually accumulates as credits to the borrower’s account, provided they keep up with their payments for a predetermined period of time.
The borrower receives the full credits accumulated when the loan is eventually paid off, such as when the property is sold. In that respect, it differs from simply writing down the principal up front, as many economists and housing advocates have urged, in that the reduction is not taken immediately.
The company reports that it offered $86 million in incentives to homeowners in 45 states through the first four months of the program. It’s not clear how investors will react to the program, although the Wall Street Journal reports that three hedge funds have contracted to participate in it so far.
Targets strategic defaults
The program is designed to prevent “strategic defaults,” deliberate defaults by homeowners who can afford their mortgage payments but simply decide to cut their losses on a home that has lost value. The company cites a study by the University of Chicago and Northwestern University that approximately 31 percent of foreclosures in March 2010 were the result of deliberate defaults by homeowners.
The question is whether investors or homeowners will find the program attractive. According to the Wall Street Journal, the average incentive homeowners can accumulate is about 10 percent of their balance. However, many borrowers have seen their home values decline much further than that, as much as 30 percent to 50 percent in hard-hit states like Florida, California and Arizona. It’s not clear whether a smaller incentive will be enough to encourage them to stick out the downturn and hope that prices recover in a decade or so.
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