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July 28th, 2009

Paying for morality?

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A big problem lenders face when foreclosing on houses is that sometimes the former owners will trash the place on their way out. This isn’t a new problem, as this 2008 Wall Street Journal article noted:

These days, bankers and mortgage companies often find that by the time they get the keys back, embittered homeowners have stripped out appliances, punched holes in walls, dumped paint on carpets and, as a parting gift, locked their pets inside to wreak further havoc. Real-estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have “substantial” damage, according to a new survey by Campbell Communications, a marketing and research firm based in Washington, D.C.

One solution, which evidently originated in Las Vegas, “is to pay homeowners hundreds or even thousands of dollars to put their anger in escrow and leave quietly.” It’s called “cash for keys,” and About.com explains it this way:

Cash for keys is a way for homeowners in foreclosure — or for tenants who are victims of foreclosure — to receive cash in exchange for surrendering the keys and vacating. Banks generally reach an agreement with the occupants of a foreclosed home, which stipulates the home will be left in good condition and cleaned. The agreements typically set forth a specific date that the home will be left vacant, including a promise from the occupants that they will not:

* Vandalize the foreclosed-upon home.

* Strip the foreclosure of light fixtures, appliances, copper.

Payments vary, depending upon the arrangement (which seems to be rather informal) between the lender and the soon-to-be-foreclosee, and the article notes that “Banks typically do not automatically offer cash for keys unless the occupant first approaches the subject.”

The arrangement makes sense, since the cost of repairing the vandalism (and, possibly, eviction proceedings) can get very expensive. The article also notes that one “[should] not try to extort the bank or the offer might be withdrawn.” But… isn’t that essentially what this is — protection money?

I couldn’t find hard numbers on how many lenders engage in cash-for-keys arrangements, but it’s now part of the the government’s Making Home Affordable program:

When all else fails, the Treasury Department is now willing to cough up cash to get homeowners to move on and to get loan servicers to forgive mortgage debt. …

Under the new initiatives, for short sales and deeds in lieu, borrowers will get up to $1,500 to assist with relocation expenses. Treasury will also pay the servicers $1,000 to complete a short sale or deed in lieu.

A deed in lieu can be the least painful way of ending a mortgage default nightmare, according to Pamela Simmons, a real estate attorney in California.

“Borrowers often prefer to end it quickly and cleanly,” she said. “They just want to get it over with.” And it’s better than just walking away from a mortgage, a situation where the debt still looms.

A deed in lieu might also be better for the banks. Banks acquire the properties back from delinquent borrowers faster and more easily, saving them legal, financial and other costs associated with going through the entire foreclosure process.

Not every deed in lieu involves “cash for keys,” but motivated lenders will often pay borrowers something, typically about $1,000, to vacate by a fixed date and to not vandalize the homes or strip it of fixtures.

Do any of our readers have any experience with this? Anyone gone throught the process? Apparently there are pitfalls to this arrangement, or it would be more widespread.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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