A 'responsible homeowner' reward
You may have heard homeowners underwater on their mortgages but not behind on the payments ask, "So where's my bailout?" (You may in fact have said it yourself.)
Some companies are answering, "Right here."
About 20,000 homeowners nationwide, including 500 in Maryland, are enrolled in the Responsible Homeowner Reward program, which pays borrowers incentives to stay current on their mortgage. The homeowners were offered the future cash payments by their mortgage servicer, mortgage owner or private mortgage insurer -- about a dozen companies are participating all told.
Frank Pallotta, managing partner of the Rumson, N.J.-based Loan Value Group, which created and administers the Responsible Homeowner Reward program, says participants include the PMI Group and GMAC Mortgage.
The dollar amounts vary, but the basic idea is this: Stay current on your mortgage, get a cash payment at an agreed-upon time -- when you refinance or sell, for instance. The program aims to prevent "strategic default" -- where borrowers who can afford the payments decide they're throwing good money after bad and simply walk away -- by offsetting some of the lost value.
"For years and years, the mindset was, people pay their mortgage because it was the moral thing to do," Pallotta said. "Well, it might have been, people pay their mortgage because they have equity. Once that equity is gone, you need to replace it or you will experience a higher default rate."
A borrower who's never missed a payment but owes 50 percent more on his mortgage than the home is worth "is as much a risk to the owner of that loan" as a more modestly underwater borrower who's two months behind, he contends. "The question becomes, 'Why am I going to make this payment? I'm so far underwater,'" he said.
The Responsible Homeowner Reward program isn't principal reduction -- it doesn't alter the terms of the mortgage -- but a New York Times piece said it amounts to the same thing. Pallotta said the incentives have allowed some homeowners to refinance into a lower rate because it reduced the amount of money they had to bring to the table to pay down the original loan enough to qualify.
Other borrowers have been told that their bank will partially -- or fully -- match every dollar above the minimum payment that they make on their second mortgage. "Second liens are almost all underwater," he said, calling them a tremendous ticking time bomb for the financial institutions that hold big numbers of them.
He said the Responsible Homeowner Reward program has lowered delinquency rates on first and second mortgages compared with control groups.
The number of borrowers who have been offered one of these incentives are a tiny percentage of the underwater crowd. Maryland alone has more than 300,000 borrowers who owe more than their homes are worth, according to estimates from real estate data firm CoreLogic.
Pallotta, who would obviously like to see participation rise, says it's up to financial companies with a stake in the loans. If a homeowner wants an incentive, "they should call up their servicer."
"Bill-paying online is something that only a few banks started to do early on," but then the rest felt the pressure as consumers called up to demand it, he noted.
Of course, it's easier to take your business elsewhere if you're moving your savings account than if you're upside down on your mortgage. But Pallotta's contention is that companies ignore underwater borrowers at their own risk.