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Some lenders offer reward for owners who stick it out

Updated: May 3, 2013 12:14PM

For a homeowner who could pay the monthly bill but is thinking about

walking away from the mortgage because the property is now worth less

than the loan, is there any way to create an incentive to hang in


Yes, there is a reward that could change this trend of strategic

defaults, according to some behavioral psychologists and economists who

have partnered with a financial services firm. The lender could provide a

solid financial "reward" for sticking around and not defaulting on a


The solution is outlined at The acronym

stands for "Responsible Homeowner Reward." It is a system being tested

by several lenders who are trying to stem the tide of "walkaways."

The concept is simple -- and even brilliant in that it does not

require a legal modification of the existing loan. So there is no

paperwork, no appraisals, no approvals, no tracking down of documents --

and no cost! The RH Rewards program simply creates a new document, a

new promise from the lender, to go along with the existing loan


The promise document says that if the homeowner will continue to make

the payments until the mortgage is repaid or refinanced, he or she will

receive a cash reward at the end.

There is no cost to the borrower. And the agreement can be canceled

at any time by the borrower. The reward can even be structured to grow

over time.

The incentive for the lender is that the cost of a foreclosure, not

to mention the ultimate sale typically made at a fraction of the

existing mortgage, weighs heavily on the financial institution. From

this cost calculation, they can afford to reward the homeowner for not

walking away.

The amount of the reward could typically range from 10 percent to as

high as 30 percent of the outstanding mortgage balance, depending on the

region of the country, the loan-to-value ratio, and the economic

climate in the local community. In a city where foreclosures move

quickly, the reward might be lower. But in an area that is swamped with

foreclosures, the lender might want to provide a larger reward to keep

the homeowner in place.

Again, the reward is not paid out until the mortgage is eventually

satisfied. But a 10 percent or 15 percent reward could materially

shorten the length of the mortgage. Imagine having your lender tell you

the balance of your loan is now down to a remaining 10 percent, so you

can apply the reward credit --and simply stop paying.

The concept is derived from the work of Wharton economist Alex

Edmans, a professor of behavioral finance. He understands the power of

incentives. Instead of offering a $20,000 principal reduction, there is

more appeal to a $20,000 cash reward, for example. By sending a monthly

reminder of the growing reward amount, the lender encourages people to

stick with their goal. And once on track to get that reward, people are

more likely to continue.

Currently, lender participants in the plan are offering more than $90

million in rewards covering approximately $1 billion of their

mortgages. To learn more -- and to encourage your bank to participate --

go to

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