Program pays underwater borrowers to stay in homes
PMI company's plan provides cash incentives for homeowners who stay put and keep up with their mortgage payments. Is that a good idea?
When we talk about ways to stem the foreclosure crisis, people who are continuing to pay their mortgages, whether their homes are underwater or not, often feel left out. Why should people who quit paying be rewarded with mortgage modifications while people who keep paying get nothing?
A private mortgage insurer called PMI Group has a plan: cash rewards for people who pay their mortgages on time.
The Responsible Homeowner Award program wasn't created out of altruism but as a way to stem strategic defaults before they happen. Nearly a quarter of Americans owe more than their homes are worth, and the percentage is much higher in hard-hit areas such as Florida, California, Nevada and Arizona.
The program aims to stem strategic default before it happens, by offering homeowners an incentive to stay put and keep paying, a cash bonus equal to 10% to 30% of the balance of the mortgage in exchange for the homeowners making payments for a certain number of years. In most cases, the cash is paid out when the house is sold or the loan refinanced.
Unfortunately, you can't go out and apply for this program. The lender has to come to you. Is your lender participating? No one knows. The names of participating lenders are not public.
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Will this private industry incentive be more effective than the government programs designed to stem foreclosure, which have had minimal success?
I recently attended a conference in which one speaker suggested that the quickest way to end the foreclosure crisis would be to refinance everyone's mortgage down to the current market value of their homes. But there isn't much political will for that.
Wharton finance professor Alex Edmans wrote a paper last fall suggesting a reward program for responsible homeowners as a solution to the foreclosure crisis, noting that more homeowners were making the business decision to walk away from mortgages and homes that were far under water.
"Now, default is a conscious choice. It's discretionary," Edmans said in an article on the Knowledge @ Wharton website. "We used to think it was automatic -- either you had the money or you didn't. But when the default becomes discretionary, the idea of incentives becomes relevant."
But Diana Olick of CNBC's "Realty Check" disagrees, expressing the sentiments of many who don't see a need to reward people for fulfilling their contractual obligations.
"If a borrower is current and can remain current for five years with a bonus after five years, then that same borrower can stay current without a bonus," she wrote. "That's a financial fact; the rest is, dare I say, enabling bad behavior."
What do you think? Is rewarding underwater borrowers who pay on time an effective way to keep more of them in their homes and stem the tide of foreclosures? Or is it just another way to enable bad behavior?
Predatory lending schemes- Of course they are!! I called a mortgage broker in 2007 and like any group there are great brokers who would advise against over borrowing and there are a large majority of unscrupulous brokers who were like bad used car salesman. They get you an underwriter, in a mortgage and in a house that a vast majority of the population had the lack of foresight to see made them house poor. I was offered a mortgage in 2007 for 256K with o% down and I made $23 per hour. When it was all said and done I would have used over 75% of my net wages for the mortgage alone. I crunched the numbers, talked to several friends and relatives and did some online research. No indications outside of Real Estate industry hype pointed to it being a sound or sustainable investment.
I see no point for me to subsidize people (or banks) that blindly followed the hype.
An analogy I like to use is that both my bank and my insurance provider would currently finance and insure me for a BMW M3. Obviously the salesman would have no issue with it. Does this mean that I should blindly live for the moment- keep up with the Joneses' and and sign up for a few years worth of payments because my banker tells me I'm allowed to and my friends would have trouble keeping up, figuratively as well as literally??
Yes, I'd say 80% of financial institutions and/or their staff are predatory. Television evangelists ditto. So Ojibwa5 , I'm sure that my list of financial predators I'm sure is not a comprehensive one. Some of your point is taken. I still like to blame other people even when I've made a bad decision in many areas of my life.
Just like the comment below; you agreed to a contract that stated what you thought the house was worth and that you would repay it in full. If ou were able to pay it then - then you should be able to repay it now. Defaulting and breaching our contract should not be an option. Buy within your means and plan for the future. I had to cut a check to sell my old home and move into a new one but I still didnt default.
Looking at a home as an investment means just that - you accept the risk associated with that investment.
Man up and own your responsibilities. Its not the government's repsonsiblity to clean up this mess (i.e. taxpayers) as if they could if they should. The government can't even help themselves why should we expect them to help everyone else.
I sure could use some help . I bought my house 20k below value and now its worth less than 50% of what I owe, never been late with a payment. this was my buy for reasale at my time of retirment... that dream is dead and I see now wayy to sell and retire.
I will have to retire and move into my old rv and leave the house behind. At that time I will haave lost 250k in equity. what will the bank lose ..... nothing. They write of their losses. me I will lose my home and my credit rate will go down the tube . So much for hard work and honesty.
day before yesterday out of the blue I get an overnight letter from Citi, a few months back they sent a letter about my homeowners insurance policy that they said I had not renewed which I had, i called my insurance comapny and they said they would take care of it. i forgot and didnt call to verify....so my 1st thought is crap, they are going to tack some stupid amount onto my loan for their insurance....
but no, I opened it and it was a single sheet of paper saying that since I was a good customer and always made my payment, I could get a 300 dollar prepaid visa card every 3 months for the next year if I continue to stay current on my 2nd mortgage.
so in my area, my house is underwater because of 2 foreclosures and I have been looking at ways to get something down to bring it more into the actual value of the home because of all of the mess the banks created.
maybe they realize that my 2nd is now nothing more than unsecured debt that they couldnt foreclose on if I stopped paying it.
oh well, I will take their money while I figure something out....
Many have been complaining about this same thing.
We have been desperately paying our mortgages and home equity loans, while trying to balance the rest of our obligations, just like our parents had done....
.....but we get no assistance from the government or lenders, unlike those that default or are behind in their payments.
Why would helping those that are current in their payments - but can show they are barely hanging on - be considered "enabling bad behavior".
Maybe it is better to default, or faultier on payments - and then receive help through the Mortgage Modification Programs - rather than worry about how to make your Mortgage and/or Home Equity payments.
Another problem is that many with Mortgages and Home Equity Loans have salaries or income that prohibit them from receiving assistance, even though they are also "underwater" and barely able to make all of their obligations.
Its enabling bad behavior. At the end of the day the buyer agreed that the house was worth what they paid when they signed the contract. The buyer promised to pay the money with the terms that were given. I understand homeowner in America, I'm underwater too but I've seen many walk away from their homes not because they couldn't afford it but because they felt it wasn't worth what they paid. If the bank wants to change the terms like reducing the interest rate, remove PMI, or change an ARM to a 30yr fixed then that's great but it shouldn't be expected.
I bet Diana Olick house is not underwater. I would like to know where she gets off calling this a bonus.
The loan modification program is a joke. I speak from experience. It took my daughter almost a year to finally get her issue resolved.
If there is a program for underwater home owners then why is it not made available???? In my opinion it is better for both the leander and the home owner until this real estate crises is over. I tried to refinance but no one will even talk to me. I am retired and on a fixed income but no one cares.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.