Lenders offer 'cash for keys' to speed foreclosures

Cash for keys
Columbia Heights residents William Herzog and his wife were offered cash if they agreed to move out of the home they've rented for a year and leave the place clean. The owner of the property foreclosed, and Fannie Mae now owns the house. Many mortgage lenders are offering such incentives, officially known as relocation assistance but often called "cash for keys."
MPR Photo/Jess Mador

With the foreclosure crisis continuing, banks are struggling to clear foreclosures from their books. To help speed the process, many mortgage lenders are offering people cold hard cash to vacate their homes more quickly.

Here's how it works: Once a house goes through foreclosure it belongs to the bank. So, the bank offers the former owner or tenant a deal -- move out by a set date, take all your stuff with you and leave the place in what's called "broom swept" condition.

The industry calls it relocation assistance, but it's commonly known as "cash for keys."

On a recent evening, William Herzog and his wife sat at the kitchen table going over their options.

After the house they've been renting went through foreclosure, the lender, Fannie Mae, offered them cash to move out ahead of the legally mandated 90-day deadline.

"If we left right away it would be $3,600. If we left after one month it would be $2,400," Herzog said.

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The money would be a big help. The Herzogs rented this Columbia Heights house after going through a foreclosure of their own. About six months after they signed the lease on this new place and moved in, they discovered it was in foreclosure, too.

The owner is believed to be out of the country, on the run. The Herzogs can only assume their rent payments lined the owner's pockets instead of going towards the mortgage.

It's been a tough few years. The Herzogs haven't decided yet whether to take the cash or try and hold out for a little longer.

Cash for keys deals are nothing new, but with more foreclosures on the market these days, they're more common.

Cash for keys deals are nothing new, but with more foreclosures on the market these days, they're more common.

Payments usually range from the hundreds of dollars to a few thousand dollars. Most banks calculate the payout based on the property's market value.

For banks, offering cash for keys is much cheaper than maintaining a property until the end of the foreclosure process, and then possibly having to bring eviction proceedings against the occupant.

In Minnesota, where the foreclosure process takes about a year, that's a big savings.

And for the people who rent or owned the home, this helps them avoid the ugly potential of eviction, and gives them some money they can use to start over someplace else.

J.K. Huey is senior vice president of Wells Fargo Home Mortgage, which services one of every six mortgages in the country. Huey says the company cannot put a foreclosed property back on the market until it's vacant. That's why cash for keys makes sense.

"If we can get the property back in better condition, that is always going to be beneficial," Huey said. "Because then we have to spend less money to repair the property on behalf of our investor to get it in marketable condition."

Huey says keeping more vacant foreclosures off the market helps stabilize home values and helps the country recover from the housing crisis.

Nearly four million households nationwide are delinquent on their mortgages. In Minnesota, pre-foreclosure notices are up in the first quarter of this year. If the trend continues, housing experts predict we could see more foreclosures this year than last year.

Foreclosures make up about half the business of realtor Frank D'Angelo of Twin Cities Exit Realty Nexus. D'Angelo says cash for keys saves banks thousands of dollars that would otherwise go towards removing trash and the belongings people leave behind.

"It's almost like a property preservation piece. They are getting a 'broom clean' home, and typically not getting it all kicked in and bashed in and all of that," said D'Angelo.

It's not uncommon, he says, for foreclosed homeowners to take out their frustrations on a house. Some people even walk away with fixtures and pipes.

Back in Columbia Heights, the Herzogs aren't interested in causing any trouble.

Rifling through a stack of foreclosure papers, William Herzog looks around the spacious kitchen. He says with his wife's serious health problems, a foreclosure and now a bankruptcy on their record, they could use a little more time to get back on their feet.

"We don't want to move again. We are in our 50s now and neither one of us feels like moving, moving, moving," he said. "We want to kind of settle and we don't really think that this is where we are going to be settling. But for now, it's going to have to do until our credit gets better."

Fannie Mae also offers the option of staying in the foreclosed home as renters, until the bank looks for a new buyer.

"They asked us if we want to stay, and we said we would like to stay if the rent is right," said Herzog.

If the rent is more than they can afford, the Herzogs say they'll have no choice but to take the cash for keys and move on.