Today's Blog takes a look at Howard "Howie" Hubler, the former mortgage trader who was blamed for a big Wall Street loss three years ago. Now, he's launched a start-up that is making a new bet on housing.

While his company, Loan Value Group, doesn't own or buy mortgages, the company has come up with a way for banks to guard against the risk that more homeowners will voluntarily walk away from homes that are worth far less than the amount they owe.

As concerns about these so-called "strategic" defaults mount, more mortgage investors and lenders could begin to sign up for the company's product. Called the "Responsible Homeowner Reward," it essentially pays borrowers a small amount of money in exchange for staying current on their loan.

Here's how the program works: when an investor signs up, they decide how to structure and size a "reward" for the borrower. As long as borrowers make their loan payments, their reward will grow up to a certain amount. Usually, the reward, which could average 10% of the loan balance, can only be claimed when the loan is paid off.

While the size of the reward probably won't give borrowers positive equity, it's designed to change their attitude towards paying an underwater loan: it gives them something to lose (besides the underwater house).

Loan Value Group is trying to take aim at one of the biggest unresolved problems in housing: Nearly 23% of all homeowners with a mortgage, or around 11 million borrowers, are underwater. The company is betting that more homeowners in hard-hit markets will begin to reconsider whether it makes sense to pay the mortgage--and that banks are going to take action to guard against that risk.

That worry is becoming more widespread. Earlier this summer, Fannie Mae took steps to warn of stiffer penalties against borrowers who walk away. And the federal government last week rolled out a program designed to help refinance underwater homeowners that are current on their loans into smaller mortgages.

So far, three hedge funds have signed up to use the "Responsible Homeowner Reward" product, and two of those firms have expanded their use of the product beyond their initial round. Loan Value says it has offered nearly $90 million in rewards on loans on behalf of participating mortgage investors.

"The cost of doing it is significantly less than the cost of a few defaults," said one distressed loan investor that began using the product on performing loans earlier this year.

It's still an open question whether Loan Value Group will have the kind of uptake that the company is hoping for. "In our experience, giving people cash incentives to do the right thing doesn't really play out as powerfully as the incentive of a principal adjustment, if they agree to a new payment and make it," says Daniel Alpert, managing director at Westwood Capital, which buys distressed loans.

But Loan Value Group sees an opportunity because many investors are reluctant to take that drastic step and write down loan balances, especially for borrowers that are current on their loans. Principal reduction is expensive and can be tricky to implement.

The program is trying to work around hurdles that have stymied loan modification programs so far. Many investors don't want to write down loan balances if there's a second mortgage on the property, because they believe the second-lien holder should have to take the hit. The reward can help get around that problem.

Moreover, Loan Value Group deals directly with borrowers, who are contacted by company representatives, on behalf of mortgage owners, bypassing the overwhelmed servicers that traditionally handle modifications. Company officials say that means they can apply their product quickly--within 48 hours--rather than the weeks or months that can be involved in finalizing a normal modification.

The program is paid for by whoever owns the loan. Borrowers pay nothing if they're selected to use the program, and participation doesn't affect credit scores. The company's pitch to investors is that they can apply the reward while skirting accounting rules that would normally require a modified mortgage to be written down. Rewards can also be applied on top of loans that have been modified.

The government hasn't had a great track record modifying loans--do private sector solutions like these hold more promise?

By Nick Timiraos