An immediate “cash for keys” solution to the foreclosure mess is probably knocking at the door. Mortgage servicers have long been striving to reach a single broad settlement for critical deficiencies related to the foreclosure process, but this is yet to materialize due to internal disagreements among participants.
According to a Financial Times report, the Federal Deposit Insurance Corporation (FDIC) chaired a meeting last Monday. The agenda of the meeting was to figure out a quick fix for the foreclosure crisis. At the private meeting, regulators asked top five mortgage servicers to pay up to $21,000 to delinquent borrowers.
Though the proposal to compensate borrowers for their homes is yet to be finalized, we can presume that, if enacted, it would teach mortgage servicers a valuable lesson and alleviate the looming threat on housing recovery.
What is ‘Cash for Keys’?
Cash for keys offer is a deal under which mortgage servicers give money to distressed homeowners for vacating their foreclosed homes. This would be a win-win solution for both homeowners and mortgage servicers. Doling out money to distressed homeowners is a smart solution to winning the key to their homes faster as the extra cash would help them look for an alternate address. At the same time, due to the quick move of homeowners, mortgage servicers get foreclosed homes in better conditions than they would have been in case of an eviction. Usually, a quicker move is compensated with a higher amount.
According to the source, under the latest circumstance,mortgage servicers would have to pay up to $1,000 to borrowers who delayed their mortgage payments by more than 90 days for independent financial advice and up to $20,000 (depending on how quickly the vacate the house) for an alternative living arrangement.
Some servicers have already started the process of paying borrowers to vacate their foreclosed homes but these amounts are not attractive enough. So we see the latest plan as the key to success for a housing market recovery.
Which Servicers to Settle?
Except Bank of America Corp. (BAC), no other names of the mortgage servicers were disclosed. However, we think that Citigroup Inc. (C) and Wells Fargo & Co. (WFC) will likely be part of the settlement as well.
Who Else Will Fund?
Other than the mortgage servicers, there is a possibility that the government-sponsored enterprises such as Fannie Mae (FNMA) and Freddie Mac (FMCC), and some private mortgage investors will also provide money for the settlement.
Delay due to Discord
In February, the groups involved in negotiations were unable to reach an agreement unanimously as it was difficult to frame a universal settlement that would protect mortgage servicers from innumerable fines, lawsuits and criticism.
Among many proposals, the negotiators suggested that this ought to be the biggest monetary settlement, amounting to as much as $20 billion. Other alternatives were also considered and differences in opinion sprouted. Eventually, the penalty could be also in the form of a waiver of principal without forcing mortgage servicers to pay a fine.
What Went Wrong?
At the time of foreclosing homes, many lenders use ‘robo-signers’—employees who sign hundreds of documents a day without verifying decisive information like the previously outstanding amounts of borrowers.
Despite being aware of the imminent danger, the negligence of homeowners and lawyers aggravated this problem. In many cases, signatures were not reviewed by any notary. And even when notarizations took place, it was unlikely that the officials executed the signings keeping legal requirements in mind.
Flawed paperwork also raised questions about the validity of ownership documents. There are many cases in which an individual who moved into a house after a payment may not be the legal owner. This resulted in mortgage lenders improperly expelling original owners from their homes as part of their foreclosure process.
Foreclosure in the Home Stretch?
According to the newspaper, the ‘cash for keys’ proposal was not official and is still pending the final decision. Also, some of the servicers are strongly against this settlement. As huge cash outflow is involved in this process, it’s quite obvious that the mortgage servicers will go against it. Initiating some measures to solve critical deficiencies sounds a much better idea than delaying the settlement due to lingering disagreements.
Whatever be the form of settlement, it would be a significant step in controlling regulatory violations that would in turn put an end to the foreclosure crisis. While regulators battle out how to put the housing sector back in order, we can only sit and stare at the growing disarray.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
FANNIE MAE (FNMA): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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