Arch Bay Capital, Irvine, Calif., is testing the use of borrower rewards for timely payment, with the aim of driving better performance, refinancing or modifications.

The industry hedge fund that selectively trades distressed mortgage assets is applying the reward program provided by Loan Value Group (LVG), Rumson, N.J., to unspecified loans in its portfolio.

In a statement, Robert Mattesky, senior vice president, capital markets, at Arch Bay Capital, said the rewards could be a key tool for the fund as it works toward maximizing returns for investors.

The move is part of a trend toward wider use of the rewards, said Frank Pallotta, managing partner, LVG, in an interview.

"We've got 10 active participants" from various parts of the industry including the hedge fund sector, mortgage insurers and banks, he said.

The original program was designed keep borrowers paying over the term of the note but it has evolved over time so that some players are now using it to drive refinancing and modifications.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.