Citi unveils kinder, gentler foreclosure plan

CitiMortgage has come up with a new kinder, gentler foreclosure program for homeowners in states hard hit by the real estate bust.

The program doesn't actually call for foreclosure, but a deed in lieu of foreclosure, in which the lender agrees to take back the home and forgive the debt without going through the foreclosure process. Citi’s pilot program is aimed at borrowers who don’t want to keep their homes, such as those who might pursue a strategic default rather than keep a home with a mortgage that far exceeds the home’s value.

"At CitiMortgage, we're committed to finding every solution possible to help families facing foreclosure. However, the reality is that not every homeowner has the financial ability to remain in their home," Sanjiv Das, CEO of CitiMortgage, said in a news release. "The goal of the program is to help homeowners make a smooth transition into the next chapter of their lives. “

Homeowners who participate in the program can stay in their homes for six months as long as they pay utilities. Whether the homeowner has to pay other items -- association fees, property taxes and insurance -- will be negotiated. The homeowner has to keep the property in its current condition and participate in relocation counseling. After six months, CitiMortgage will provide at least $1,000 in relocation assistance in exchange for the homeowner turning over the deed.

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To be eligible, a homeowner must occupy the property and be at least 90 days behind on payments. Citi will first explore a mortgage modification and a short sale, in which the home is sold for less than the mortgage amount.

The program initially will operate only in Texas, Florida, Illinois, Michigan, New Jersey and Ohio and is expected to include about 1,000 homeowners. If it is successful, it may expand to other states.

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While the program sounds promising, it doesn’t differ much from what a homeowner would do now if he or she didn’t want to keep the house but wanted to avoid foreclosure. Most lenders require homeowners to first try a short sale before they will consider a deed in lieu of foreclosure.

If Citi can actually deliver a short sale or a deed in lieu of foreclosure to those homeowners within six months, that could be an improvement over the current situation.

Homeowners and real-estate agents complain that lenders often take so long to decide whether to accept offers on short sale homes that the buyers walk away, and the process has to start over.

Lita Epstein wrote about the difficulty of doing a short sale in Daily Finance.

For many in the hardest hit areas, working out a short sale is frequently not an option when the home value is so low that a buyer starts considering walking away. That's because the banks are often not willing to accept a low enough offer. For example, in Central Florida, where I live, real estate agents have told me they stopped even showing short-sale homes because they can't get the banks to agree to the offers and it's a waste of their time.

That could change April 5, when new Treasury Department rules will require lenders that received TARP bailout funds to decide on short sales within 10 days. The new rules allow sellers to receive up to $1,500 in relocation funds and require lenders to forgive the remaining debt.

Citi's pilot program is just a drop in the bucket, writes Epstein in another post at Daily Finance. She quotes a Moody's Economy.com forecast that 9,583,563 first mortgages will go into default between 2009 and 2011, with 4,824,709 homes sold as foreclosures and only 1,031,615 sold through short sales or given up through deeds in lieu of foreclosure.

The program has some similarities to Fannie Mae’s Deed-for-Lease program, which allows borrowers to stay in the property as renters for a year in exchange for maintaining the home and turning over the keys at the end of the year.

Epstein notes that the new program could save Citi substantial money over going through the foreclosure process. She quoted figures from the Joint Economic Committee of Congress, which found that the average foreclosure costs $77,935, while a foreclosure prevention plan costs about $3,300.

Related reading:

• Are you foolish to pay your mortgage?
• An invisible threat to home values
• Banks really do prefer foreclosure