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
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
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?
April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis
Mike “Mish” Shedlock