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Life can be so ironic sometimes. Long-term mortgage interest rates have hit new all-time lows this past month and yet virtually everyone who wants to take advantage of them, can't. Instead, millions of American homeowners are locked into high monthly payments or adjustable payments, unable to qualify for refinance loans because their mortgages are underwater, they have poor credit, or they have lost their jobs. It is estimated that in 2010 there will be roughly 3.5 million foreclosure filings, as these borrowers are unable to meet their monthly commitments.
Sometimes it seems there is just no way out of the foreclosure crisis but to just let all the struggling borrowers fail and have their homes resold at current market values, allowing the market to self-correct. While logically the plan is sound, it is a very cruel and painful resolution for the millions of borrowers. Besides losing their homes, it destroys their credit for several years, making it impossible to get another home loan in the mean time.
Many borrowers have turned to short sales as an easier way out of a mortgage contract, rather than undergoing a full-scale foreclosure. Yet these are long, drawn-out processes, with the constant fear that the bank might reject the deal. Some lenders are now encouraging homeowners to take a different route - deed-in-lieu of foreclosure - to speed up the process and eat away at the huge backlog of foreclosures to be dealt with.
Deed-in-lieu deals allow borrowers to essentially give back the house in exchange for complete forgiveness of the mortgage debt. This is most appealing to those who are severely underwater on their loans. They get to hand over the deed and walk away free and clear of all the debt that would have been hard to discharge through a short sale.
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"A lot of owners just want to be finished with it now," said Travis Hamel Olsen of Loan Resolution in Scottsdale, Ariz. as quoted in a recent Washington Post article. . "They don't want to deal with [the house] anymore."
Mortgage lenders also like deed-in-lieu's because it is a simpler, quicker process. They can take place within 30 days in some cases. Banks have the advantage here of receiving a property expeditiously without all the added paperwork and court judgments . They can then turn the properties around much quicker than they could foreclosed ones. And with interest rates parked so low, lenders are anxious to get these homes out on the market during the popular summer home buying months.
According to the Post article, Bank of America likes deed-in-lieu deals so much that it has mailed out advertisements for them to 100,000 of its targeted customers in the past two months. The company is even offering cash incentives of up to $15,000 for deed-in-lieu participants. Apparently, plenty of borrowers are taking them up on the offer because Bank of America is reported a record number of these exchanges on their books.
While deed-in-lieu deals will hurt borrower credit scores the same as a short sale will, they won't hurt nearly as much as a foreclosure would and mortgage giant Fannie Mae has now said it will allow borrowers involved with deed-in-lieu's to qualify for government-backed loans just two years afterward, instead of four years as the rule used to be.
These transactions don't work for everyone, including those who have second mortgages, but they just may be the trend of the future when it comes to foreclosure alternatives.
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