Heading off evictions, bank lets owners become legal squatters
The pilot "Foreclosure Alternatives" program has some clear advantages over an outright foreclosure eviction: because homeowners give up their houses, they take less of a hit to their credit rating and, the lender hopes, they will be less likely to trash that house on their way out the door.
Several similar efforts have already begun, including Fannie Mae and Freddie Mac's version, in which homeowners can give up their deed and become renters. Vacant properties are vulnerable to vandalism, giving banks another reason to keep them occupied. The vandalism concern has been reinforced for lenders in Detroit, for instance, through extensive national news coverage of gutted and stripped neighborhoods, according to Michigan mortgage broker Drew Sygit.
Indeed, Michigan is one of the states targeted by Citi, along with Texas, Florida, Illinois, New Jersey and Ohio. Notably absent from this list is California, raising the question of whether Citi was concerned its 1,000-participant estimate would be exploded by including the foreclosure capital of the world.
Formally known as a "deed in lieu of foreclosure," the procedure has been around for awhile, but rarely used and even more rarely with some incentive for the homeowner to go quietly.
Of course it also allows banks to avoid potentially costly legal battles associated with evictions, which makes it even more surprising that more have not found their way to Citigroup's conclusion yet, particularly with the high inventories of foreclosed homes they are already carrying on their books. In a masterful understatement, Citigroup CEO Sanjiv Das talked of those broader economic concerns: "We are concerned that if there is a foreclosure glut at some point in the cycle it would have to have a negative impact on house prices," Das, chief executive of CitiMortgage, told the Wall Street Journal (subscription required).
Last WalletPop checked the vast majority of the country -- including the six states Citi has identified for its pilot program -- already is fully involved in that glut cycle. Those representing distressed homeowners have long advocated for leniency in this area. But, until now some said, there has been little indication that the major banks were listening.
In Philadelphia, attorney Matthew Weisberg previously told WalletPop that a special local conciliation program between borrowers and lenders tended to merely postpone the inevitable sheriff's sales. "Banks appear not to have any ability to do loss mitigation – they don't have any people to do it," Weisberg said. "They are a headless robot."