Has It Come to This — Paying Even Current Homeowners to Stay?
by Tim Manni
University of Arizona law professor Brent T. White made some major waves after he wrote a paper titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” White became one of the first academics to advocate strategic defaults — also known as walking away from your mortgage (on purpose).
One of White’s many points was that perhaps if more borrowers walked away it would prompt more lenders to move struggling borrowers into permanent loan modifications.
Well it seems as though the financial threat of these strategic defaults has launched one financial group into action. The program, dubbed the “Responsible Homeowner Reward program,” (RHR) is designed to pay incentives to homeowners who could be a threat to walk away.
From National Mortgage News (”Stopping Underwater Borrowers from Mailing in the Keys,” by Bonnie Sinnock), (emphasis added):
Through RHR, a certain amount of incentive funds are set aside separate from the unchanged existing loan. These funds accumulate every month a borrower makes a scheduled payment for a period such as five years, regardless of home price direction. The borrowers would lose all funds and accrued value if they were 30 days late on a payment in any 12-month period. Homeowners that meet the program’s requirements for timely payments receive the funds when the loan is paid off. Some other options for the incentive funds have been discussed such as using them to pay down the outstanding balance of a refinance loan.
Mortgage risk holders ultimately decide the size of the payment to the borrower but can base it on a behavioral model LVG [Loan Value Group] offers. The model provides a range based on factors that include negative equity, income and geography, [Frank Pallotta, executive vice president and managing partner at LVG] said. The company offers as part of the service other additional information about borrowers on a regular basis that may be helpful to clients, Mr. Pallotta said. Servicers, who are already largely overburdened and have their roles constrained by contracts, don’t have to take on responsibility for the RHR program, which LVG and its operational partner take care of. They may benefit from it, though, Mr. Pallotta said.
Negative equity is a rampant problem that is not only at the forefront of the housing crisis, but is also what seems to be at the core of strategic defaults. By HSH.com’s reckoning, the underwater problem will be with us for a long time to come yet, and will likely drive short-sale and deed-in-lieu activity for years.
Strategic defaulters tend to be borrowers who can technically still afford to make their monthly payments, but their homes are so far underwater that they decide that it’s not worth it — it all comes down to the desire to pay, not the ability to pay.
More from National Mortgage News (emphasis added):
The distinction between affordability and strategic defaults is key when sizing up how big the “strategic default” issue is, according to Alan Paylor, president and chief executive officer of REO Leasing Solutions LLC, Houston. When default is strategic, or “voluntary,” then “incentives start to matter,” Mr. Edmans said.
Mr. Pallotta said he believes mortgage risk holders need to focus more on default that is “strategic” rather than due to affordability concerns, something Mr. Edmans indicates represents a departure from traditional thinking for the industry.
“They’re using an affordability platform to address a negative equity crisis,” Mr. Pallotta said. “If there’s too much negative equity borrowers are going to default, regardless of income and mortgage assets. I don’t think the owners of mortgage risk have their eye enough on the ball as far as negative equity.”
Why would lenders be willing to pay out incentives just for people to stay in their homes? “Since there are no apparent changes to the face amount of the loan under this kind of plan, it would appear to be all about the avoidance of principal writedowns,” explains HSH.com’s VP Keith Gumbinger.
While the details surrounding the “Responsible Homeowner Reward program” are still quite thin, we’ve been skeptical about this initiative, and have had several questions about this since we first read about it earlier this week in Nick Timiraos’s Wall Street Journal blog post.
What’s the cost to lenders — will the costs associated with this program be a better deal for them than a modification, short sale, or even a foreclosure?
How will borrowers respond? For example, let’s say a homeowner is $75,000 in the hole — are the incentives offered in this program enough to bring the borrower back to a position where walking away is no longer an option?
According to National Mortgage News, LVG is advocating their program as something that “may allow lenders and other parties to avoid other types of more costly loan remediation efforts such as reduction of principal in cases where strategic default is the real concern, [Mr. Pallotta] said.”
-For more on strategic defaults, a.k.a. walk aways, be sure to read the following:
Home Equity: Why 2015 is the New Zero
Is Renting the New American Dream?
Walking Away from Your Mortgage: Emotion or Logic?
