FDIC Proposal? Pay Borrowers $20,000 To Walk Away

Mar 29, 2011

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EDITOR’S NOTE: At this point I have absolutely no corroboration of this story. Normally I would not print it for that reason. BUT I am starting to get scattered reports of some very similar settlement structures involving as much as $50,000 for the homeowner to step away. I did a little thinking about it and it actually makes some sense from the banks’ point of view.

As more and more revelations come spewing forth from the court system regarding fabricated, forged document and perjured testimony the momentum for homeowners to contest foreclosures is picking up. Right now the situation is still solidly with the banks with around 96% of homeowners meekly walking away from their home, not realizing that the “lender” was paid and that the “bank” or “trustee” that is after them is getting a free house.

The figure of 4% of contested foreclosures is double what it was just 18 months ago at 2%. If it starts rolling, we could be at 8% or 16% or more. Paying the borrower to get out eliminates one more potential decision that goes on the books against the banks. From the banks’ point of view the payment of even $50,000 is spread out over many (hundreds?) more homes that might otherwise be contested.

When you do the math, you can see that the numbers closely match the cost of “cash for keys”. In fact, it could cut the cost of cash for keys if it has the desired effect of suppressing adversary proceedings with the usual claims of fraud, appraisal fraud, forgery and fabrication of documents. And it eliminates the potentially huge liability out there for appraisal fraud, slander of title, and identity theft by the securitizers.

As for the rest of the article about how unfair it is to everyone else, the writer is missing the point completely. These were deals that were closed by way of deception. If the investor-lenders knew the truth, they would never have advanced the funds. If the homeowners knew the truth they would never have put up their house (remember 50% of these deals were refi’s) much less signed any papers.

While the number of lies told at closing is astonishingly large, the main one was that the property was worth more than the loan and that this had been confirmed through standard underwriting procedure by a real lender acting as a lender at risk. This was not true and so the victim of this fraud has an absolute right to be put back in the position he/she was in before they were defrauded.

The writer below is arguing against the rule of law and inserting some distorted sense of morality that is not applied in other types of transactions where the same thing happened. Think about it — why else would the offer be made to walk away? It isn’t a gift, so the banks must believe they are getting something of value out of that payment. What is it that they are paying for? The answer is obviously that they don’t want defend actions for fraud. Otherwise they would just clean up the paperwork and go ahead with foreclosures that would be mainly clerical procedures.

FDIC Proposal: Pay Borrowers $20,000 To Walk Away

In its attempt to save the housing industry, government regulators have come out with one dumb bailout after another. The FDIC may have topped them all however in their recent proposal to pay borrowers up to $20,000 to walk away. [Thanks L!]

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.

23% of all mortgage holders are now underwater. What motivation would any of them have to continue paying their mortgage if they could be paid $20,000 in cash if they quit paying their mortgage for several months and walked away?

If the FDIC is looking to punish lenders, this certainly ought to do it. It would also punish the rest of us:

[T]he write-offs would reward the most financially irresponsible borrowers, while punishing responsibility. If you were thrifty, and made a big downpayment, you will not be eligible for a write-off, since your mortgage will still be smaller than your house is worth, even if your house declined in value. But if you saved little money, and took out a no-downpayment loan, your loan may be bigger than the value of your house even if the value of your house didn’t fall much. Even a small fall in value would leave you “underwater” on your loan, and thus eligible for a bailout under the proposed settlement, to reduce the size of your mortgage to less than your home value.

(Eligible doesn’t mean you will necessarily get a bailout; the settlement requires banks and mortgage services to satisfy numerical “quotas” of how many mortgages to write down, not to write down the vast majority of such mortgages. The banks actually have perverse incentives under the settlement to give such help to the people who least need it, according to sources cited in a Washington Post story.) Banks say the proposed settlement would discriminate against people who “paid on time and honored their obligations,” that it raises “serious moral hazard issues,” and “could retard the recovery by encouraging borrowers to default.” The settlement will also increase borrowing costs in the future for home buyers, since banks will have to hedge against the risk of future loan write-offs by charging higher interest rates (much as credit card companies raised interest rates and fees after Congress passed a law limiting penalties for irresponsible credit card holders). So credit will become more expensive for those of us who are responsible in paying our creditors regularly.

Why is this plan even on the table?

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.

The “mega settlement” may be an attempt for a simple solution, but the situation for every borrower is different, and needs to be treated as such. There is no “one size fits all” solution to mortgage fraud when it’s not always clear in each instance who was defrauding whom, or even if fraud occurred. Here’s hoping this “walking away for fun and profit” proposal dies on the table.

Posted in bubble, Corruption, Eviction, securities fraud |