Citi's Unique Mortgage Proposal

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One giant lender has taken a novel approach to dealing with delinquent mortgage borrowers. Citigroup (Stock Quote: C) has rolled out a new plan that would allow borrowers to remain in their homes — free of charge — for six months. All the borrower has to do is sign over ownership of the home to the bank.

How is this possible? In short, banks are getting fed up over delinquent mortgage borrowers. According to a 2009 national survey from Reecon Advisors, 9.2% of U.S. homeowners would opt for default if their homes were underwater (i.e. when the loan value exceeds the home’s value).

A breach line is beginning to emerge on such mortgages, and banks have likely taken notice. A First American Logic study shows that when a home’s value falls to 75% of what’s owed on the mortgage, homeowners begin thinking about mailing those house keys in to the lender and walking out the door. The report estimates there are 4.5 million U.S. homeowners who have their mortgages underwater through the third quarter of 2009.

Banks have also no doubt seen the January study from Transunion that shows Americans place a higher priority on paying their credit card and auto debt than they do their home mortgage. If banks can bail, the thinking goes, then homeowners increasingly believe they can, too.

Well, Citi has seen enough. A pilot program called “Foreclosure Alternatives” launched on Feb. 12 will enable underwater Citi mortgage borrowers to evade foreclosure, and still live in their homes as long as they sign over the deed to the bank. It’s called a “deed-in-lieu-of-foreclosure” program and it’s now available for Citi borrowers in Ohio, New Jersey, Illinois, Michigan, Texas and Florida.

Citi views the “legal squatting” program as a helpful “transition” for troubled borrowers. In fact, that’s the exact term used by CitiMortgage chief executive officer Sanjiv Das. In a press statement, Das said "The goal of the program is to help homeowners make a smooth transition into the next chapter of their lives." He called the Foreclosure Alternatives Program a "creative, innovative" way to "help our customers across a variety of difficult financial situations." He also calls it a firewall against a "negative impact on house prices.”

Here is a thumbnail sketch of how the program works:

  1. Borrowers contact Citi and says they’re underwater on their mortgage loans.
  2. Citi reviews the mortgage and examines the borrower’s financial situation.
  3. Before green-lighting the pilot program, Citi evaluates the borrower for a loan modification or even a short sale.
  4. If those options don’t pan out, Citi can declare the borrower eligible, but only if the homeowner is at least 90 days late on their mortgage payments.
  5. Homeowners must agree to surrender their home (via the deed transfer) after six months.
  6. Citi will help out with relocation expenses, providing at least $1,000 in moving expenses to program participants. Professional relocation counseling may also be provided.

So what’s in it for Citi? Primarily, the bank earns big savings by avoiding foreclosure. A Congressional report estimates the cost of foreclosure to mortgage lenders to be about $78,000. But the Citi pilot program should only cost a few thousands dollars per household, thus potentially saving the bank millions of dollars.

By avoiding foreclosure, City also hopes that grateful homeowners won’t trash the place on their way out the door. By controlling the situation — and having an occupant over the six-month period, the bank also reduces the chances of vandals damaging the home. That’s a big problem, especially in big city neighborhoods.

Is legal squatting a “win-win” for both banks and borrowers? No. But it’s also much further away from the “lose-lose” proposition that foreclosures provide. And right now, that’s good enough for both parties.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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