New Foreclosure Fix: Pay to Stay

New York State Banking Superintendent Richard NeimanThe idea kept coming up this week. Since Congress won't push mortgage lenders and servicers to reduce the principal overwhelmed borrowers owe, then why not find another way to give them financial relief: cash payments.

First a company called Loan Value Group rolled out a product it calls the "Responsible Homeowner Award," which makes incentive payments to deeply underwater borrowers who might otherwise walk away from their mortgages. (An estimated one in three borrowers now owe more than their homes are worth.) The payments are made by investors in mortgage-backed securities who stand to take serious losses as borrowers go into foreclosure. Homeowners who sign up would not be able to access the funds until the mortgages are paid off, or they've amassed enough equity to sell or refinance their homes. Loan Value Group expects that the promise of a tasty bonus at the end of the rainbow will be enough to entice some borrowers to stick it out and hope for a turnaround in home prices.

Then the idea got a plug from a big man in banking, New York State Banking Superintendent Richard Neiman (pictured), who wrote a letter to The New York Times supporting a similar concept.
"Lenders should provide homeowners with a cash credit each month for as long as the homeowner makes monthly payments, which the homeowner can gain access to after the mortgage is paid off or refinanced. Thus, the homeowner will have an incentive to stay in the home and keep making payments while the lender avoids a near-term write-down," Neiman wrote.

Neiman is also a member of the TARP Congressional Oversight Panel, and he's become extremely concerned that the existing Home Affordable Modification Program (HAMP) is actually making matters worse for underwater homeowners, by removing pressure on lenders to reduce principal owed.

Turns out Neiman has had meetings with Loan Value Group. "Those kinds of solutions and programs are worth exploring," he told Housing Watch. He says he has raised the idea with Treasury officials, while also pressing them to allow TARP to provide financial aid to another hurting group of borrowers: homeowners who are not underwater but have lost their jobs.

Paying cash bonuses is a promising idea, with some kinks to work out. Since borrowers would be able to cash in on the bonus when they refinance, they might be tempted to get new mortgages en masse once home prices recover, which could leave mortgage securities investors with losses even on borrowers who don't go into foreclosure. And more fundamentally, it means encouraging underwater homeowners to gamble on a return of higher home prices – good for lenders and investors, perhaps, but not always for the borrower. But hey, HAMP is essentially doing that anyway. The proposed payments just sweeten the pot - and just maybe makes those rising home prices a self-fulfilling prophecy.
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