Cash for Keys, Neither Simple nor Straightforward

As my partner, Rick Mitchell, outlined in “Cash for Keys?” walking away from a mortgage obligation is neither simple nor straightforward.

As with short sales, 90%+ of our clients have other debts in addition to the mortgage debt that’s addressed in a deed in lieu/cash for keys offer and those debts remain after a deed in lieu or other “mortgage fix.” For these people, a deed in lieu is at best a Band Aid when a tourniquet would be more appropriate.  Moreover, this BandAid will not resolve their overall financial picture and may well make it worse.

A Cash for Keys offer usually uses a deed in lieu

For the borrower, deeds in lieu are similar to short sales in that a wide variety of facts must be considered in order to make a decision about the legal, tax and credit consequences. Facts to be considered include:

1. the original documents related to the mortgage and the documents relating to the deed in lieu (typically, both drafted by the lender),
2. the character of the real estate securing the mortgage (primary residence or investment property),
3. in what state the property is located, and what exemptions the borrower can claim, and
4. the borrower’s overall financial circumstances.

Not a rosy picture

Reuters recently published an overall optimistic article about cash for keys, saying banks now with adequate reserves are arranging deed-in-lieu and short sale agreements themselves after two years of loan modification programs and foreclosure moratoriums that have largely failed to stem the tide of defaults. What bothers me about the article is the way it used “fresh start” language. Only a bankruptcy can give a true fresh start. Further, it implies that a deed in lieu will not negatively affect the borrower’s credit. This is simply untrue.

Is cash for keys a short sale or deed in lieu?

Technically, it could resemble either according to the particular offer extended.  Normally, I would say deed in lieu. However, a creditor might say to the debtor “Bring us an acceptable short sale, and we will pay you X from the closing.” Therefore, it probably would apply to both.

Let’s speak clearly:  short sales work great for the banks and mortgage companies, and the realtors love them because they generate a commission. They are not so great for the debtors. In fact, they can be downright disastrous. We discourage them for that reason. That having been said, there are a few very limited instances in which short sales can be good for debtors. Unfortunately, they are few and far between.

While homeowners in distress have similarities, each case must be weighed for its unique financial and emotional considerations. A counselor qualified in real estate and/or bankruptcy should be consulted before accepting any creditor’s offer.