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Green Shoot or Yellow Weed?: Uncle Sam Hands Out 'Cash for Keys'

Written By Brian Hicks

Posted May 19, 2009



With foreclosures still skyrocketing and some 22% of American homeowners underwater on the mortgage, the U.S. Government has announced yet another plan to help fix it all.

This time, things have gotten so bad that Uncle Sam is paying some of them cash to just simply walk away….

From CNNMoney by Les Christie entitled: Treasury Department is giving ‘cash for keys’

“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.

The new initiatives are part of the government’s Making Home Affordable program.

Under the original program, unveiled earlier this year, homeowners could be eligible for loan adjustments or refinancings if they meet several criteria: the home must be their primary residence, for example, and the mortgage balance must be no more than $729,750.

Even then, however, mortgage help is not assured. The homeowners may still not be able to afford reduced monthly mortgage payments of 31% of income. And to protect the investors who own the mortgage, the value of a modified loan still has to be greater than the value of what would be recovered in foreclosure.

In these cases, lenders first consider a short sale, a deal in which the home is sold for less than the mortgage balance, and loan servicers may forgive the difference.

If that is unsuccessful, the final step is a “deed in lieu of foreclosure,” when borrowers voluntarily forfeit the deed and the debt may be erased.

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.”

Green shoot or yellow weed?

I’ll let you decide.

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