From cnbc.com:
As home values continue to fall and more borrowers fall into a negative equity position on their home loans, those who stand to lose, banks and investors, are working to keep borrowers current.
To date, they have focused on delinquent borrowers, offering loan modifications and foreclosure alternatives, like short sales and deeds in lieu of foreclosure.
Last fall, New Jersey-based Loan Value Group launched a new business model, offering lenders and mortgage investors a way to keep their current, but underwater, borrowers current through cash incentives.
It’s called Responsible Homeowner Reward, and today, one of the nation’s largest mortgage insurers, PMI Mortgage Insurance, joined in.
Here’s how it works. Borrowers pay nothing. They sign up with the program, promising to keep current on their mortgages for a certain period, generally 36 to 60 months (LVG has worked out the contract with the participating lender/investor).
After that period, the borrower will be paid anywhere from 10 to 30 percent of the loan principal, depending on the contract, in cash. The lenders/investors pay LVG, which receives a servicing fee, and LVG pays the borrowers. Again, the borrowers pay nothing for this bonus.
The PMI deal works the same, with PMI paying a scaled reward for select borrowers over a five-year period. If the borrowers stay current, they earn the payoff over the five years and receive the cash at the end. PMI created its own subsidiary, Homeowner Reward, but that subsidiary will work with LVG, and PMI will pay LVG an administration fee.
To date, 38 states have borrowers enrolled in the LVG program, totaling approximately 10,000, according to LVG. The largest number of borrowers are from the hardest hit states, California, Florida, Arizona, Nevada and Michigan.
So far, RH Rewards has offered, but not paid out, $107,393,922, according to the company’s website.
“All of those states have achieved greater than 50 percent reduction in default rates than respective control group,” said an LVG spokesperson.
Okay, so now that we get it, we have to ask what exactly are we getting here? From a purely business perspective, it makes sense. By targeting borrowers with the most negative equity and therefore at the greatest risk of strategic default, lenders and investors are cutting their losses by keeping the borrowers current. They stand to lose more in a foreclosure.
But does it sound slightly ironic to anyone else that a mortgage insurance company, whose business is to insure loans by charging borrowers premium fees, is now paying those very same borrowers back to stay current on the loans they’re insuring??
“For borrowers in our pilot program, Responsible Homeowner Reward (SM) provides an incentive to stay current on their mortgage by helping them earn an offset to the decline in home values. Such programs, if successful, could reduce the incidence of foreclosure, which could help stabilize house prices and stabilize communities,” said Chris Hovey, PMI’s SVP of Servicing Operations and Loss Management.
It’s business, a numbers game where companies have now figured out how much they need to pay to avert a larger loss. Apparently we have hit that tipping point where strategic default is now so pervasive and so acceptable that companies are forced to pay borrowers to stop.
So what exactly is the difference between that and principal write-down, which the big lenders seem to abhor as a bigger moral hazard even for borrowers facing foreclosure?
In an interview with HousingWire back in April of this year, the managing partner of LVG, Frank Palotta, said, “There is little focus on loss-mitigation efforts for current loans, as these homeowners typically pay. As a result, the vast majority of these homeowners are left with no other option than to become ‘the squeaky wheel’ by becoming delinquent in order to receive a call from their servicer.”
a) why do we need loss-mitigation on current loans? These loans are current, and until they go 30 days delinquent, we need to focus our loss-mitigation on the huge volume of borrowers who are in trouble. And b) why do current borrowers have “no other option that to become….delinquent” to receive a call from a servicer? Why does a servicer need to be holding the borrower’s hand at every step, cajoling and coddling him/her into fulfilling a contractual obligation?
This is a bailout program I like. Non deadbeats get rewarded.
I dig the fact that as I read the article, then noticed there was 1 comment, I said in my head “come on, It’s got to be Shadash”…and I was rewarded! Its the little victories in life…
I wonder if the signed paperwork includes waiving of certain potential clouded title problems with, say, MERS…
Banks don’t have to recognize a loss.
Insurer will not pay on a claim.
Property taxes don’t go down.
Win-win-win.
Kicked the can down the road.
Amerika is great.
While this is another bailout program it might actually work to some degree and for the banks it’s a pretty decent deal. Obviously all things considered a home owner would be much better off with an initial principal reduction (that would lower the total interest paid over the life of the loan), but this could appear to people’s desire to get fairly large windfall.
Every year people let the government collect interest on tax payments so they can get 2-3K back in taxes at the end of the year and they seem to be happier to get that bigger windfall than just setting the W-2 holding to get the extra $200-300/month. Some people who would save possibly $100K by walking away and starting over, would be more than willing to pay more over the long haul so they get their $20-30K of free money in 5 years.
Based on inflation it might be a benefit to the homeowner, but that’s difficult to predict with certainty.
Here is my letter to the LVG CEO which I am mailing today. đ
—
Dear Mr. Hubler,
I recently read about your Responsible Homeowner Reward program. I am very excited about this program. I want to ask if you could offer a similar program that may help out my situation. We shall call this new program the “Responsible Non-Homeowner Reward.” This new program that your company will start will offer rewards to people like me who did not participate in the bubble mania. We did not buy homes we could not afford. We did not take out second mortgages to buy Hummers and BMW’s or build back yard sanctuaries complete with putting greens and outdoor theaters. We instead saw the madness in the market and chose not to participate. We instead chose to lease a house and wait for the crash. We chose not to pay $800,000 for a piece of junk house in a questionable neighborhood. We chose not to listen to the constant assault of messages from Wall Street, media, Realtors, and builders that “real estate prices always go up” or “buy now because you may not be able to afford something in the future.”
We responsible non-homeowners deserve a reward. If we had been “responsible bubble participates” and became “responsible homeowners” your company would have lost many thousands of dollars on each of our loans totaling millions or billions of dollars. It is only fair if you are willing to pay “responsible homeowners” bonuses to meet their contractual mortgage contracts (i.e. Pay their bills) then I can only deduce that it makes sense that I am owed a reward for not generating loses for your company. I have done a very precise calculation and I am owed $112,464.12. Please make my check payable to .
Regards,
Responsible non-homeowner
Most likely, the principal reduction would not be free. The way our tax laws are set up currently, relief from cancellation of indebtedness income will kick in only if it is a situation where the borrower no longer retains the collateral, such as short sale or foreclosure. If the borrower retains the collateral, it is a completely different situation.
From IRS publication 4681:
http://www.irs.gov/publications/p4681/ch01.html
“Discounts and loan modifications. If a lender offers to discount (reduce) the principal balance of a loan if the loan is paid off early, or agrees to a loan modification (a âworkoutâ) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt whether or not you are personally liable for the debt. However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of debt income. The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies”
There will be one winner who gets the 30% off, and everyone else gets 10% off.
On a $500,000 mortgage you are paying down about $8,000-$9,000 per year in the first few years, and it goes up from there.
If you signed up for the program at the beginning of your second year at 4.5%, you would reduce your balance by $46,242 by regular amortization over the next five years. You can bet the fine print will include the regular amortization.
And they are offering to give you $50,000 off?
@Waiting_for_ever_to_buy
Thank you for articulating my thoughts exactly.