With so many homeowners around the nation living with mortgages that are underwater, it is no surprise why so many people decide to walk away from their home. Even some who do have the financial capabilities to pay their mortgage, just feel that it does not make any sense to continue paying on a loan that is much more than their property is worth. But now there is a new incentive for these homeowners not to walk.
This past Monday, a company from New Jersey called Loan Value Group L.L.C., announced a new program that wants to identify borrowers who are likely to “strategically default” on their mortgage. These individuals that choose to strategically walk away generally do have the financial capabilities to pay their mortgage, but do so because they feel they can start fresh somewhere else for much cheaper. Once these people are identified they will be approached with an offer of money that will be paid once the term of the loan is satisfied.
How are these homeowners identified?
Well to determine which borrowers are likely to strategically default on their mortgage, Loan Value Group will process loans using many methods. This process will include finding loans that have negative equity (LTV of 115 or more), the amount of take home income, and the geographic location of the property. To determine how much the borrower qualifies for they will use criteria that is very similar and also behavioral economic theory.
According to the executive vice president of Loan Value Group, Frank Pallotta, this program is not meant for homeowners who cannot afford their home. Therefore, the program called Responsible Homeowner Reward, is aimed at individuals that are most likely to walk away from their mortgage as a financial decision.
This program will generally be not enough funds to cover the amount of negative equity most people have acquired. It is designed to give borrowers just enough encouragement to continue paying their mortgage knowing they will receive a bonus later. The amount a borrower qualifies for will generally be about eight to ten percent of the remaining balance of the loan. But for some people in hard hit regions where foreclosure is very common, there rewards can run as high as twenty percent.
However, this reward is only to be paid once the borrower pays off the mortgage, this will include selling or refinancing the home as well. In the event of a borrower selling their home for less than what is owed (short sale), this bonus will definitely come in handy because it will help satisfy the difference between the sale price and the remaining balance of the loan.
But there are many out there who believe this program will not be a success. Mainly because homeowners that do have negative equity or can barely afford their mortgage, are in no financial position to sit around and wait for the money to arrive. Many people need the funds now or feel that if they walk away they can potentially save a lot more money in the future. These are the individuals who will most likely turn down the offer for the Responsible Homeowners Program. This program started last month and has already approached hundreds of homeowners with the reward offer. Be aware that you cannot call in and request this reward, it is by invitation only while they try to identify who is likely to strategically walk away.