The original program was designed to help, homeowners to be eligible for loan adjustments or refinancing if they meet a slew of criteria including being a loan owned by Fannie Mae or Freddie Mac, being a conforming loan limit and being a primary residence, among other things.
However, even if you meet all those qualifications, 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 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.
The borrowers who may benefit most from this program are the ones who would still not be able to repay their mortgages under any reasonable workouts.
These would include delinquent borrowers who are way underwater, owing much more on their mortgages than their homes are worth, people who have lost their jobs with little hope of finding another and ones who have gone through a divorce or another life-changing event.
In those cases, they may be better off cutting their housing expenses by switching to a rental and the cash-for-keys is one more good reason to do so.
However, the deed in lieu may not be simple. If there's a second mortgage, the lender will not allow a deed in lieu unless they get the full cooperation of the holder of the second mortgage.
To help solve that issue, Treasury will also make incentive payments to second mortgage holders, up to $1,000, if they give up all claims.
(article written by Strategic Mortgage)
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