Cash for Keys: Avoid Foreclosure, Pay the Bank Less Than What You Owe… and Get $30,000

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U.S. banks have a deal for underwater homeowners: Avoid foreclosure by selling your house for less than what you owe... and they'll pay you $30,000 or more to close the deal.

It's called Cash for Keys, and it's working.

Banks typically hate short sales because they lose money. The alternative, however, is even more costly and time-consuming. It can take thousands of dollars to evict homeowners and years to get through the backlog of paperwork.

Now regulatory investigations could lengthen the foreclosure process even more. Banks have been blamed for robo-signing - approving foreclosure papers without reviewing them - and using faulty documents to seize homes.

So instead of blocking short sales, like they have done in the past, lenders are now encouraging them. Banks don't want to keep these assets on the books, and they're willing to pay to speed up the process.

"You could sell your home, owe nothing more on your mortgage and get $30,000," JPMorgan Chase & Co. (NYSE: JPM) wrote in a letter to an underwater homeowner obtained by Bloomberg News.

Banks Prefer Cash for Keys to Costly Foreclosures

Bloomberg said California homeowner Karen Farley struck a deal with JPMorgan in which she received $30,000 for selling her home for $200,000 less than what she owed.

"I wondered, why would they offer me something, and why wouldn't they just give me the boot?" Farley, 65, told Bloomberg. "Instead, I'm getting money."

U.S. government regulators encouraged the Cash for Keys program in a private meeting with banks in March 2011 to speed up the U.S. housing market recovery.

Banks now encourage short sales by pre-approving deals, simplifying the closing process, and forfeiting their right to purse unpaid debt - in addition to paying the seller thousands of dollars.

"My guess is they want to get rid of bad loans," Trent Chapman, a realtor who trains brokers and attorneys to negotiate short sales with banks, told Bloomberg. "If they short sale these types of loans, they have less of a headache and have some goodwill with the homeowner."

Lenders ultimately lose about 15% less in short sales than they do on foreclosures, which incur years of taxes and legal costs. Short sales in the United States average about four months to close, according to Bloomberg.

Incentives Boost Short Sales

The incentives are working. Short sale deals accounted for 33% of related transactions in November 2011, up from 24% a year before, according to CoreLogic Inc. (NYSE: CLGX).

JPMorgan is known for the biggest short-sale incentive payout, but according to real estate agents other banks have followed suit.

Wells Fargo & Co. (NYSE: WFC) offers as much as $20,000 in relocation expenses for short sellers. Bank of America Corp. (NYSE: BAC) tried a short sale pilot program with 20,000 Florida homeowners, offering up to $20,000 or 5% of the unpaid loan balance.

Citigroup Inc. (NYSE: C) offers about $3,000, but the amount varies depending on each case.

Banks also fork over thousands of dollars to second-lien owners, who can block short sales because the deal wipes out their loans.

A continued increase in short sale transactions could help the U.S. housing market rebound faster than if all those homes went into foreclosure. There are currently more than 14 million U.S. homeowners with homes in foreclosure, who are behind on mortgages, or who owe more than what their properties are worth, according to RealtyTrac.

Those homes will continue to weigh on home prices and keep them low for years. U.S. home prices showed another decline for November 2011, its third straight monthly loss, as the U.S. housing market trends toward a bottom this year.

In addition to banks' Cash for Keys incentives, homeowners also can benefit from the U.S. government's Home Affordable Foreclosure Alternatives program. Started in 2010, it offers up to $3,000 for homeowners who choose short sales.

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