Original posted in the Wall Street Journal by James R. Hagerty:
Mortgage lenders are trying to arrange smoother departures for distressed homeowners who can’t be saved by loan modifications — and discourage them from trashing the homes on their way out.
CitiMortgage, a unit of Citgroup Inc., announced Wednesday a pilot project that will let some delinquent borrowers remain in their homes without making mortgage payments for six months if they voluntarily transfer ownership to the bank.
Over the past two years, millions of foreclosures have been delayed by state and federal programs requiring lenders to try to keep borrowers in their homes by easing their monthly payments. But the moment of truth is approaching for hundreds of thousands of households that sought help under the Obama administration’s Home Affordable Modification Program, or HAMP, launched a year ago, as well as borrowers who have sought help through other programs.
As of Dec. 31, about 900,000 borrowers had been given trial modifications under HAMP. Many have been unable to document that they have enough income to qualify for that program, however. Some soon will run out of options for keeping their homes.
The CitiMortgage pilot program provides incentives for more borrowers to use a procedure known as a “deed in lieu of foreclosure,” in which the borrower voluntarily transfers ownership of the home to the lender, which then cancels the mortgage debt. Aside from letting such people stay in the homes for six months, CitiMortgage says it will give them at least $1,000 to cover relocation costs, an incentive sometimes dubbed “cash for keys.”
The pilot program is available for certain people whose mortgages are owned by CitiMortgage in Texas, Florida, Illinois, Michigan, New Jersey and Ohio. The bank should benefit by avoiding legal costs and reducing the time homes are left vacant and exposed to vandalism. Participants will be required to “maintain the property in its current condition,” the bank said. It plans to expand the program if the pilot is successful.
“Something formally needs to be done in addition to the modifications,” said Sanjiv Das, chief executive of CitiMortgage. “We are in a different stage of the housing cycle. Restructuring mortgage payments was part one of the cycle, making sure that foreclosure glut doesn’t hit the industry is part two of the cycle. Citi is trying to stay ahead of it.”
The program also reflects a realization that some people have the wrong house, rather than the wrong mortgage, and want to get out, Mr. Das said.
Another alternative to foreclosure is a short sale, in which lenders agree to allow a distressed borrower to sell the home for less than the loan balance due. Though the lender takes a loss, it is often much smaller than the hit that would arise from foreclosing and then maintaining the house while waiting for it to be sold. The Greater Las Vegas Association of Realtors says about 21% of home resales in January were short sales, up from 19% a month earlier.
Potential buyers of homes in short-sale situations have long complained that banks often take months to respond to offers. But banks, prodded by the U.S. Treasury, have been trying to streamline the short-sale process. CitiMortgage last year set up a dedicated team charged with responding faster. J.P. Morgan Chase & Co. also has beefed up its short-sale team.
Bank of America Corp. said it has a pilot program that streamlines short sales. The bank said it would be able to approve sales within two weeks of receiving offers under that program. For homeowners who don’t find a buyer within 120 days, Bank of America will offer a deed in lieu. Bank of America said borrowers will have cash incentives for completing this program.
In addition, the government-backed mortgage investors Fannie Mae and Freddie Mac both have programs that allow people who give up ownership of their homes to remain in them as renters.
One big problem is that many borrowers no longer have equity in their homes and thus may be tempted to abandon them. At the end of 2009, 21% of households with mortgages on single-family homes owed more than the current value of their homes, a predicament known as being under water, according to a new estimate from Zillow.com.
Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, estimates 7.1 million of the 7.9 million households behind on their mortgage payments will lose their homes to foreclosure if nothing is done to improve current loan-modification programs. She believes banks should put much more emphasis on loan modifications that reduce the principal for people who are deeply under water.