"Cash for keys"

"Cash for keys"

Jon Daurio, chief executive officer of mortgage investor Kondaur Capital Corp., recently offered a $4,000 check to Barry Culver for the deed to his Bryan, Ohio house.

With the exchange, and a pay-off to a second-lien holder, Culver was freed of $120,000 in crushing mortgage debt on the house, said Daurio, who had bought the right to cut the deal when he purchased the mortgage months earlier. The house, after repairs, is now on the market for $47,500.

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.

The trend comes after more than two years of loan modification programs and foreclosure moratoriums that have produced mixed results, with many homeowners ineligible or defaulting again.

Where a modification isn't feasible, the U.S. Treasury in April will begin paying borrowers who 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.
U.S. modification efforts to date have been "tragic" in delaying housing and economic recovery, Daurio said.

More than 11 million properties with mortgages are "underwater," according to First American CoreLogic. Efforts to expand use of principal forgiveness haven't caught on.

Foreclosures have been stalled on more than 1 million bad loans since the U.S. Home Affordable Modification Program was announced a year ago, resulting in higher costs and losses to investors, according Moody's Investors Service.

This is delaying an inevitable clearing of the housing market that is needed for a lasting rebound, analysts said. A pent-up "shadow inventory" from failed modification efforts could destabilize the market in 2010, they worry.

The ability to customize loan workouts and earn potentially huge profits are enticing investors to the market, where loans are commonly sold at 40 cents to 60 cents per dollar of principal. Discounts give investors more room to work with borrowers than banks working to mitigate their loss.

Many loans are tied up in securities, and banks now with adequate reserves are arranging deed-in-lieu and short sale agreements themselves.