Responsible Homeowner Reward - Second Lien Acceleration

Banks reduce credit exposure with turn-key incentive program

Target Client: Banks wishing to reduce credit exposure
LVG Product: Responsible Homeowner Reward - RH Reward designed for accelerated repayments

Business Needs

Banks are increasingly aware that the underwater portion of their performing mortgage book – both 1st mortgages and 2nd lien loans and lines – carry significant credit risks. Faced with regulatory, rating agency, and shareholder pressures, and with the potential for significant credit losses in the future, these institutions need a way to proactively reduce exposure to these high-risk assets.

A sale of these mortgages is out of the question without suffering significant GAAP losses. Even for performing loans, there is still an unbridgeable gulf between 3rd party investor price expectations and most banks’ carrying value. Refinancing is also not an option, as the loans are significantly underwater. One potential solution is to work with the borrowers themselves in an effort to reduce UPB. By providing the right kind of incentive, banks can profitably encourage borrowers to either accelerate the repayment of their loans, or repay them early in full. Intuitively, many banks realize that a sub-group of borrowers exists who may have the resources and inclination to curtail or prepay given the right incentive, and that such an outcome would be highly profitable for the bank.

Given the extraordinary demands being placed on servicing and loss mitigation departments today, it can be difficult to allocate sufficient internal resources to roll out such programs in the necessary timeframe and within budget. Banks need a way to reduce exposure at the lowest cost, without relying on traditional capital markets solutions, and without burdening their existing operational infrastructure.

Solution

To meet these requirements, LVG has designed a proactive, turn-key, strategy to incentivize underwater borrowers to curtail or prepay. Select borrowers are offered a Responsible Homeowner Reward whereby accelerated repayments of loan principal are rewarded with a contingent rebate. For example, borrowers who make a curtailment of $1,000 while enrolled in the program can earn $100 toward their RH Reward, which is paid only upon full repayment of the loan, and only if the borrower maintains current status for the remaining life of the loan. The bank sets the rebate ratio based on the carrying value of the mortgage, such that the program is always profitable.

The program’s private label structure and simplicity allows for speed-to- market and launch that will take weeks, not months.

Benefits

With the launch of the RH Reward program, banks can positively influence borrower behavior, reduce exposure, and keep the riskiest borrowers current. To date, financial institutions have seen:

• More than 100% increase in principal repayment rates, driven by both increased curtailment and prepayment behavior.
• More than 50% reduction in overall delinquency rates on loans enrolled in RH Reward vs. similar “Control Group” loans.
• Minimal operational and technology resource requirement (a truly turn- key program).
• Positive GAAP net income impact net of all program costs.

By means of this program, banks are essentially selling the risk back to the borrowers themselves (rather than selling to a third-party investor, for example), at an all-in price significantly higher than the current market price.