Paying Homeowners Money to Stay Works

By Mike Colpitts

A former Wall Street banker, who started a company to save homeowners with mortgages from foreclosure has enrolled just short RH Reward Program of 10,000 borrowers in its RH Reward program that is paying cash rewards to hurting homeowners. The plan works with banks and other financial institutions, including hedge funds to work with upside down homeowners at risk of defaulting, and is making money for its borrowers.

Frank Pallotta, who worked for Goldman Sachs on Wall Street, started the innovative program with just a handful of banks more than a year ago. The program has grown to include more than 15 banks and other lending institutions, but has been slow to get off the ground to help more mortgage borrowers under financial distress, despite the record number of foreclosures banks are sustaining.

The number of home mortgages with negative equity was 11.2-million at the end of 2010, according to real estate research firm Core Logic, which tracks underwater borrowers for lenders. Nevada had the highest number with 70% of properties upside down, followed by Arizona (51%), Florida (48%), Michigan (39%) and California (34%).

Mortgage servicing companies and banks are receiving heavy criticism for their lack of working with borrowers to modify home mortgages, and work out other solutions to halt the tsunami of foreclosures that have reached record levels.

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“What they (banks) are starting to realize is that a program like this empowers the borrower and the lender,” said Palotta. “It’s incentivized people to come to the table together to work out a solution.”

An agreement between a lender and mortgage borrower can be worked out in a matter of days, and it can take as little as 10 minutes to get started with an application. Only a limited number of mortgage companies are enrolled in the program, which has seen conversion rates as high as 92% from the first point of contact with borrowers.

“We have been working on hundreds of thousands of loans to figure out strategies,” said Pallotta, who says that most of his company’s work so far has been to strategically determine how best to help borrowers and lenders. The former Wall Street banker, whose New Jersey staff has grown since the beginning of the program declined to name lending institutions involved in the program since banks and other lenders refuse to let him do so under contractual agreements.

Despite the plans slow growth, Loan Value Group has seen a ten-fold increase in its business working with under water mortgage holders since it started the innovative program that pays cash money to homeowners it recruits through banks that it enrolls. Pallotta and his team were instrumental in aiding Wall Street banking giant Morgan Stanley avoid additional banking losses prior to the financial crisis meltdown in 2008.

Underwater homeowners, who are as much as 80% down in home value from the market’s peak in the hardest hit regions of the U.S., are being helped in 45 states. Florida, California, Nevada, Michigan and Illinois homeowners have sustained the largest losses in equity, according to industry analysts.

Those enrolled in the Loan Value program are paid a cash reward at the time they either sell their home or refinance the home’s mortgage, and may use the money for anything they want.