Citigroup (C) has announced a pilot program called the Citi Foreclosure Alternatives Program that will allow CitiMortgage borrowers to avoid foreclosure and remain in their homes for six months, as long as they agree to sign over the deeds to their properties.At the end of the six months, Citi will aid the borrowers with relocation. This expanded deed-in-lieu-of-foreclosure program will be available as a pilot in Texas, Florida, Illinois, Michigan, New Jersey and Ohio beginning Feb. 12.
Sanjiv Das, CEO of CitiMortgage, said in a press release, "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."
Citi realizes that the "foreclosure glut" will at some point in the cycle have a "negative impact on house prices," Das explained. He hopes the pilot program will prevent a build-up of foreclosed homes, according to an interview with the Wall Street Journal. Aren't they coming a bit late to the party? On Wednesday, DailyFinance reported on the likely double-dip in homes prices.
Relocation Assistance and Counseling Part of the Deal
Under Citi's pilot program, borrowers will agree to turn over their deeds after a period of up to six months, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly expenses that Citi determines the homeowner can no longer afford, such as homeowner's association and escrow fees. The extent of Citi's assistance will be determined on a case-by-case basis, depending on the borrower's financial circumstances.
Before entering the program, borrowers must first be evaluated for a permanent mortgage modification. If the homeowner doesn't qualify for a modification, CitiMortgage will consider the possibility of a short sale or this deed-in-lieu-of-foreclosure program. By avoiding foreclosure costs and encouraging borrowers to take care of their homes, Citi could save millions of dollars. Only those borrowers who occupy the property and hold a first mortgage with clear title owned by CitiMortgage will be eligible after they are at least 90 days delinquent on their mortgage.
Citi expects the initial pilot to help about 1,000 families, but if successful it could be expanded to other parts of the United States. Das explained in a press release, "By helping to avoid the foreclosure process, which can be very stressful and distracting, and keeping people in their homes long enough to make an orderly transition to the next stage of their lives, we are also supporting neighborhood revitalization and stabilization efforts, which are crucial to the nation's economic recovery."
Das did not discuss now costly foreclosures could be or how this program could save Citi money. The Joint Economic Committee of Congress found that the average foreclosure costs $77,935, while foreclosure prevention methods cost $3,300. Citi's program to avoid foreclosure will likely cost more than $3,300, depending on how much of a borrower's monthly expenses the bank will pay, but it certainly won't be anywhere near the cost of foreclosure.
Pilot Program is Just a Drop in the Bucket
Citi's pilot for up to 1,000 people is just a drop in the bucket, however, when faced with the grim numbers from Moody's Economy.com. Economist Celia Chen said Moody's forecasts 9,583,563 first mortgage loan defaults between 2009 and 2011, with 4,824,709 homes sold as foreclosures and just 1,031,615 sold through short sales or given up through a deed-in-lieu-of-foreclosure plan. Clearly the banks need to find alternatives that work to get a handle on these astronomical numbers and attempt to reverse the foreclosure trend.
Attached to Citi's press release on the pilot program was a report on the third quarter 2009 foreclosure prevention efforts, which showed how severely the housing market is deteriorating -- even though Citi reported that loss-mitigation actions for borrowers were up approximately 82% in the third quarter of 2009, as compared with the second quarter of 2009. The nationwide average of its total serviced mortgage loans showed 5.8% of all loans were more than 90 days past due in the third quarter of 2009. Customers whose FICO scores were below 620 were 18.1% past due more than 90 days.
The numbers were even higher in states hardest hit by the collapse of the housing market. For example, in Nevada 12.1% of serviced mortgage loans were more than 90 days past due, while 26.3% of loans with FICO scores below 620 were more than 90 days past due. Florida also had one of the worst records with 12.3% of all services loans more than 90 days past due, while 28.2% of loans where borrowers had FICO scores under 620 were more than 90 days delinquent.
Other Programs to Help Avoid Forelcosure
Citi's new program is unique, but other plans are out there to allow borrowers stay in their homes, even if they can't afford their mortgages. In November Fannie Mae (FNM) announced its "Deed-for-Lease" program, which allows borrowers to get a 12-month lease for the property in exchange for turning over the keys and maintaining the property. A Fannie Mae spokesperson said it was too early to judge the success of this program, but through the third quarter of 2009 about 2,000 former homeowners surrendered their deeds under the program.
Banks need to find more workable alternatives for all the people in financial distress, especially those unemployed or with loans underwater by hundreds of thousands of dollars. Buyers are beginning to make their own choices, such as strategic default, even if they have the money to pay. Programs like the ones from from Fannie Mae and Citi may prove to be good alternatives and encourage more banks to take the lead with creative programs.
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