Will Rewarding Borrowers Prevent Defaults?

February 18, 2010

Source: The Wall Street Journal, Nick Timiaros

Will paying underwater borrowers to keep meeting their mortgage obligations prevent them from walking away?

Loan Value Group LLC says it is working with a major mortgage lender to test this theory.

Here's the plan: The mortgage investor offers a cash reward to borrowers to keep paying. The amount varies by borrower based on income, negative equity, geography, and other risk factors. The more likely a borrower will default, the bigger the carrot.

The borrower can't collect the payment until the mortgage is paid, although the rewards can be used to help pay off the mortgage if the property is sold.

The plan keeps lenders from having to mark properties to market and take big losses. Frank Pallotta, a founder of Loan Value Group and former executive at Morgan Stanley and Credit Suisse, says the program will pay for itself if only a few borrowers stay put and keep paying.

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