Loan Value Group Rewards to Prevent Default Pay Off
A strategic default prevention program that may seem pretentious has taken the market by storm fulfilling the often unachievable goal of offering a win-win solution for all parties involved.
Earlier this year Loan Value Group LLC, Rumson, N.J., pioneered an incentive-based program to address potential strategic default among over 10 million U.S. homes "with substantial negative equity" that represent nearly $2 trillion of mortgage debt held by various investors around the world.
The Responsible Homeowner Reward program was developed with a foundation in behavioral economics. It is a private-label option that creates incentives that encourage borrowers to remain current on their mortgage but does not change the terms of the original mortgage note or reduce principal. It employs patent-pending technology developed by LVG and was launched in partnership with one of the largest investors in U.S. mortgage debt (that chose to remain anonymous during the rollout phase).
RH Reward is a unique structure that does not cost anything to the borrower, "yet the homeowner receives the full benefit of the reward," says LVG CEO Howard Hubler. Its key selling point is the ability to offer it to at-risk owners "in a variable cost, turn-key fashion without burdening their current infrastructure," he says. The goal is to create an incentive for the borrower "that positively influences behavior, at a cost to the at-risk owner that is far cheaper than every other option, including delinquency, sale of the note, or default."
By June hundreds of homeowners have benefited from the program. A LVG analysis of eligible borrowers shows that most inquiries come from the states that have lost more equity during the crisis with over two-thirds of inquiries coming from borrowers with an outstanding first and second lien. Almost one-fourth, or 23%, of the borrower inquiries are from California, and 15% from Florida; the current loan-to-value of the average borrower is approximately 144% and the average first-lien balance is $335,950.
The RH Reward program presents a pre-emptive loss mitigation strategy for servicers and financial flexibility to mortgage owners. It is effective because it promotes proper payment behavior, but doesn't change the existing mortgage note or burden the servicer, Hubler said. "It is, by far, cheaper and simpler to implement in scale than any other loss mitigation strategy."
RH Reward borrowers can be "closed" within only a few days compared to a few months needed for a typical loan modification-and that is possible because the mortgage is not being restructured and does not have to go through the legal and administrative requirements of a normal modification. Eligible homeowners receive an initial RH Reward amount. To keep their status active they must make full and timely mortgage payments for a fixed period of time after which an additional amount of money is added to the initial reward for each month homeowners remain in active status. Once the mortgage balance is paid in full either by a home sale, refinance, or paying off of the mortgage, the homeowner can withdraw the entire RH Reward. Often the program helps borrowers repair their personal balance sheets and avoid default, says RH Reward's Frank Pallotta. "These borrowers are looking for help, not a bailout. A default-strategic or otherwise-helps no one."