Banks are exploring new programs that incentivize mortgage holders who are underwater to stay in their homes. One program developed by Loan Value Group offers mortgage holders with a reward of 10 percent of the mortgage, which is paid to the homeowner when the home is sold or paid off. See the following article from The Street for more on this.
Contrary to what some may believe, many banks are eager to keep homeowners in their homes, not just than push them out, at least in certain situations.
For proof of this, just look at the Loan Value Group, a private company in New Jersey that partners with lenders around the country to stop homeowners who are underwater on their mortgage from abandoning their homes.
According to The Boston Globe, homeowners can apply to be part of the company’s Responsible Homeowner Reward program, which pays select candidates about 10% of their mortgage as an incentive to stay in their homes rather than default on their payments. Meanwhile, lenders can pay a fee to sign up for the program and pick out the homeowners whom they’d like to reward for staying put. Essentially, the Loan Value Group acts as a middleman between the two parties.
“The reward … is paid to the homeowner when the house is sold or paid off. By doing so, the lender saves the costs of foreclosure and the difference between what it is owed and the foreclosure-sale price,” the paper reports.
As the Loan Value Group notes, there are two kinds of mortgage defaults: those that occur because the homeowner can no longer afford payments, and those that occur because the value of the home is actually worth less than the mortgage, which makes continued payments seem like a bad investment. The company’s goal is to tackle this second type, known as a strategic default, which is quickly becoming a major issue for the housing market.
At the moment, there are about 14 million homeowners in this country who owe more money on their mortgage than their home is worth, and some estimate this number may hit 20 million by the end of next year. On top of that, a survey last month from the Pew Research Group found that more than a third of Americans believe it is acceptable to walk away from a mortgage, even if you are able to afford making the payments.
Of course, this new initiative raises two larger questions: Does it ever make sense to walk away from a mortgage, and if so, would this kind of incentive be enough of a reason for homeowners to change their minds?
As we’ve reported before, if you owe 25% or more on your mortgage than what the home itself is worth, then yes, it does make sense financially to walk away. Even in this case, though, there is an obvious downside. By pursuing a strategic default, you will severely damage your credit score and make it significantly more difficult to get loans in the future.
If you are someone with a home that is 25% underwater and on the verge of a strategic default, having someone pay you 10% of your mortgage when the home is sold certainly won’t raise your equity back out of the red. It arguably accomplishes two things that are more basic, though: It opens up a kind of dialogue between the lender and borrower to figure out what to do with the property, and it gives the desperate homeowner a positive focus. And the process may help them to help themselves by continuing to make payments, thereby protecting their credit scores.
This article has been republished from The Street. You can also view this article at The Street, an investment news and analysis site.