FDIC “Cash for Keys” Proposal Would Pay Underwater Homeowners $21,000 to Walk Away

The Financial Times reports US Banks in ‘Cash for Keys’ Foreclosure Talks

The five biggest US mortgage servicers were told this week at a private meeting with regulators to consider paying delinquent borrowers up to $21,000 each as part of a broader settlement of the foreclosure crisis.

People who attended the meeting, chaired by the Federal Deposit Insurance Corporation on Monday, said the industry-wide “cash for keys” program would involve the biggest servicers, led by Bank of America paying borrowers as an incentive to leave their homes.

Banks would pay borrowers who are more than 90 days behind on mortgage payments up to $1,000 to seek independent financial advice and up to $20,000 in cash as a “fresh start” payment towards living costs in a new home. They would have to vacate their properties quickly and leave them in good condition.

Sheila Bair, FDIC chairman, raised the idea but people involved said it was not an official government proposal and was rejected strongly by some of the banks.

The Department of Justice; state attorneys-general; banking regulators, including the FDIC; the Treasury; and the new Consumer Financial Protection Bureau are among the agencies trying to come to a settlement with the industry. A combined penalty of about $20 billion has been discussed, with one idea to use the money to write down the outstanding debt of struggling homeowners.

However, prospects for a single “mega settlement” have worsened because officials disagree on the level of penalty and whether money raised in fines should be used for a principal writedown. The banking regulators, who do not agree among themselves, are nonetheless keen to come to an agreement quickly.

One way through the gridlock, which has been discussed among officials, is giving the servicers a menu of options for settlement, which might include principal writedown or a “cash for keys” scheme.

No Winnable Actions

If this absurd proposal were to pass, can someone tell me who the hell the banks would sell those properties to, how fast, and at what loss?

Of course I also want to know what valuation these distressed properties are kept on bank balance sheets if banks do not immediately take possession.

Is there a winning action here?

Obama’s $20 Billion Civil Fine Scheme

Bear in mind the FDIC discussion stems from Obama’s request for $20 Billion in Civil Fines, Money to be Used for Loan Modifications.

How Far would the Money Go?

Let’s assume this proposal is adopted. How many would benefit? The answer of course depends on the criteria. However, but the goal seems to be to help those in distress, so let’s use those currently in distress as a starting point.

Total Non-Current and Delinquent Loans

 FDIC Cash for Keys Proposal Would Pay Underwater Homeowners $21,000 to Walk Away

The above chart and following stats from the LPS Mortgage Monitor, January Observations

  • As of December 2010 there were 2,117,845 90+ day delinquent loans.
  • As of December 2010 there were 2,555,799 30-60 day delinquent loans.
  • As of December 2010 there were 2,195,940 in foreclosure.
  • As of December 2010 there were 6,869,584 in total non-current loans

Those in foreclosure are clearly too far gone to help. If we take $20 billion and spread it out over the rest, we can calculate mortgage principal reductions several ways.

  • $20 billion divided by 2,555,799 would give everyone 30-60 days late a principal reduction of $7,825
  • $20 billion divided by 2,118,845 would give everyone 90+ days late a principal reduction of $9,439
  • $20 billion divided by both groups would give everyone a principal reduction of $4,278

This is supposed to help?

By the way, history suggests once someone gets to 90+ days late, the situation is hopeless. Even if the $20 billion was entirely thrown at those 30-60 days late, we are talking about principal reductions of under $8,000.

Doing Nothing Not a Solution

Assuming banks gave everyone $20,000, they would help 1 million people. However, what would banks do with those 1 million “cash for keys” houses?

If banks helped 2 million people at 10,000 each, what would banks do with another 2 million houses?

However, doing nothing is not a solution given there are 6,869,584 in total non-current loans of which 2,195,940 are already in the foreclosure process.

One irony is that previous programs attempted to halt foreclosures, this would speed it up.

While I see merit in speeding things up, I see little merit in forcing banks to pay $20 billion to kick people out of their houses.

Kicking the Can

The administration, the banks, the FDIC, and the Fed have collectively managed to kick the can down the road. Meanwhile the problem keeps growing.

In Prison for Taking a Liar Loan

Of all the crooked bankers from the top on down, of all the millions of potential cases, government managed to go after a one person who took out two liar loans.

Please consider In Prison for Taking a Liar Loan

This story is truly amazing, you have to read it to appreciate it.

I do not condone liar loans but sending someone to prison for that is more than a bit ridiculous. The punishment should fit the crime.

By the way what does it cost to imprison someone for 2 years? Meanwhile let’s recap my rolling list of bank fraud and what little was done about it.

Rolling List of High Profile Fraud Targets

October 10, 2010: FDIC Authorizes $1 Billion Lawsuits Against Failed-Bank Executives; Token Search for Low-Profile Scapegoats

April 29, 2010: Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal, TARP Insider Trading; New York Fed Implicated

April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

March 2, 2010: Geithner’s Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”

January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels

January 26, 2010: Questions Geithner Cannot Escape

January 07, 2010: Time To Indict Geithner For Securities Fraud

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America “Turd in the Punchbowl”

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

Mike “Mish” Shedlock

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About Greg Fielding

I am a longtime real estate agent who has pretty much seen it all during the housing boom as bust. With experience in selling high-end property and low-end foreclosures, raw land, short sales, development work, apartment buildings, and working with investors, I bring a well-rounded perspective to my work.I also have started to do some paid real estate consulting. If you have questions or just need some good real estate advice, book an appointment at http://whattodorealestate.com/In addition to selling real estate, my insights have been featured in The New York Times, The Big Picture, and regularly on Patrick.net. I have also done consulting work with ForeclosureRadar.Starting my career, in 2003, I have sold homes throughout Alameda and Contra Costa counties, specializing in Danville, Alamo, Blackhawk, San Ramon, Dublin, Pleasanton, Walnut Creek, Lafayette, and Orinda. I live in Danville with my three kids.

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One thought on “FDIC “Cash for Keys” Proposal Would Pay Underwater Homeowners $21,000 to Walk Away

  1. Jason Rush

    While it is recognized that Phoenix was one of the hardest hit with the housing Boom and Correction. It should also be noted that Phoenix has always proven to be a growth market. With that I believe we will fair better than many market as we look at the housing correction as a whole. Great posting.

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