With tumbling property values leaving nearly a quarter of borrowers owing more on their mortgage than the home is worth, some may find it tempting to walk away even if they are financially able to keep makingpayments – either to get out from under the debt completely or to force the servicer’s hand for a modification. This idea of “strategic default” has become a universal concern within the industry, but one New Jersey company says it has a plan to counter such calculated flights of exodus.
According to the Loan Value Group LLC (LVG), it’s time to pay current borrowers to stay that way. The company introduced a new program this week that helps lenders and servicers identify borrowers at risk of walking away and implement an incentive program in which the homeowner receives a monetary “reward” if they remain current on their payments without changing the terms of the original mortgage note or reducing principal.
The Responsible Homeowner Reward (RH Reward) program was developed on a foundation of behavioral economics and employs patent-pending technology developed by LVG. The firm evaluates each individual borrower’s propensity to strategically default (as distinct from the risk of affordability default) based on a dozen criteria, including negative equity, income, and geography, and then determines the optimal size of each “reward.”
This financial compensation is awarded to the homeowner when the terms of the loan are satisfied and the mortgage is paid, although the reward can be applied to pay off the mortgage if the property is sold. If the borrower subsequently defaults after enrolling in the program, the reward is never paid, costing the loan owner nothing, LVG explained.
The company says the desired outcome for all parties is to create an incentive for the borrower that positively influences behavior, at a cost to the lender that is far cheaper than every other option, including the overall cost of a foreclosure, principal reduction, or loan sale.
In addition, LVG noted that typical loan modifications can take up to four months, but a borrower receiving an RH Reward can be closed in days after being selected to participate in the program. RH Reward can also legally be implemented for both securitized and unsecuritized loans without penalizing either the borrower or security holder.
Loan Value Group says the program is being launched with one of the largest investors in consumer and mortgage debt in the United States. The client, who requested anonymity during the rollout phase, has purchased and sold over $5 billion of debt since 2008, LVG said.
The social stigma attached to foreclosure has changed dramatically as the housing crisis has gained momentum, and defaulting strategically is not as frowned on by the general public as it used to be. Recent studies have shown that when a borrower is upside down on the mortgage by as much as 20 percent, they are far more inclined to simply walk away from the property.
According to the Loan Value Group, there are more than 10 million homes in the United States with substantial negative equity — representing nearly $2 trillion of mortgage debt. That’s an unsettling number that might feel inclined to take flight.