Yahoo! News has posted an article about how some homeowners with bad mortgages, and potentially facing foreclosure, are opting for an interesting solution where they sell the deed to their house and are released from a mortgage.
Owners of bad loans are increasingly making deals with borrowers to avoid a foreclosure, which tends to reduce returns for investors and place a black mark on the homeowner’s credit. Lawmakers and regulators are becoming more accepting of these solutions even though they mean the borrower loses the home.
Due to the “tragic” success of the government’s mortgage modification plan, beginning in April the US Treasury will begin paying borrowers to “agree to a deed-in-lieu of foreclosure or short sale, where a home is sold for less than outstanding debt. Unlike most modifications, those actions erase excess debt and reset home values, solving the problem of underwater loans that are a top cause of defaults.”
This will hopefully have a positive effect on the housing market. A modification that simply keeps people in homes they can’t afford anyway doesn’t really do any good. This results in the delay of housing depreciation.
The article uses the example of an Ohio homeowner who accepted $4,000 from a second-lien holder for the deed to his home that he owed a $120,000 mortgage debt on. The house is now on the market for $47,500…much less than what was owed on it. This is growing more popular, called “Cash for Keys”, with volumes of loans being up for sale at their highest since July 2007.
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