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Crazy Foreclosure Alternatives?

Homeowners can’t pay their mortgages and are being forced from their homes. Others can pay but decide to just ‘walk away’ instead. Both scenarios have created a flood of foreclosures that neither the government nor the banking industry can handle.

The modification programs, though genuine in their effort, have failed. The banks can’t handle what they currently have in their REO inventory. And there are millions still coming.

This situation has given birth to new foreclosure alternatives that are either very creative or pretty crazy. I’ll let you decide.

1.) ‘Cram Downs’

Realizing that ‘negative equity’ is the major problem, banks are now considering reducing the mortgage principle on borrowers who are behind in their payments. In an article at Bloomberg.com it was reported:

Federal Deposit Insurance Corp. Chairman Sheila Bair may ask lenders to cut the principal on as much as $45 billion in mortgages acquired from seized banks, expanding her bid to aid homeowners as unemployment rises.

“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”

And it seems banks might agree!

Challenge as I see it: Why wouldn’t more people just stop paying the mortgage in order to get the same deal. I would love to have the equity in my home increase by having my principle lowered.

2.) Stop Paying Us, But Please DON’T Move!

Citigroup has a pilot program which will allow the borrower to stay in the house for six months without any further payments if they sign the house over to the bank. As The New York Times reported:

Citigroup is introducing a pilot program that would let homeowners on the verge of foreclosure stay in their homes for six months, provided that they turn over the deed to the property.

Citi will begin the program, called Foreclosure Alternatives, this week in Florida, Illinois, Michigan, New Jersey, Ohio and Texas, and may expand it nationwide. Initially, about 1,000 homeowners are expected to participate.

Challenge as I see it: Similar to above. Won’t this cause more people who are struggling to keep the roof over their head to stop paying their mortgage on the hope that they could live rent free for six months?

3.) We’ll Pay You if You Pay Us

Loan Value Group LLC is selling the idea that, in order to stop people from giving up on their mortgage, you should pay them to pay the mortgage! The Wall Street Journal reported on this idea:

The mortgage investor (possibly joining with other risk holders, such as mortgage insurers or second-mortgage holders) offers a cash reward to borrowers if they agree to keep paying their mortgage. The incentive amount varies by borrower depending on income, negative equity, geography and other risk factors—those who are more likely to cause steep losses receive a bigger carrot. The “responsible homeowner reward” grows for up to five years as the borrower makes monthly mortgage payments.

Challenge as I see it: I have no idea what to say! Paying someone to pay you. It just seems very strange.

I guess we should be happy that the banks are trying to think of innovative ways to stop the flood of foreclosures about to hit the market. But if this is the best they can come up with, we might have a difficult year ahead of us.

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