Monday, November 26, 2007

Trendwatch: Outsourcing REO to deinquent borrowers

There's an article in the Wall Street Journal that may be the indication of a new trend. According to DealMaker, Citi is making delinquent borrowers in fear of foreclosure an interesting offer. "You handle our REO, your current residence at least, and we won't go after you for any gap between what you sell your house for and what you owe us."

The good news for borrowers: you get to go back to being a renter without having a huge debt burden following you around for the rest of your life.

The good news for lenders: many of those costs associated with REO can be handed back to the borrower.

The risks for the borrower: your credit will still be destroyed and unless you get this in writing you may still be on the hook for the money. Also, there could be other fees tacked on by the lender as well as limitations on what offers you can accept. Plus, your deal could get all messed up at the closing table if the current lender doesn't release the old loan smoothly.

The risks for the lender: unless borrowers trust you (or fear you), they might get angry and damage the house. Also, fraud is a huge threat as borrowers might just sell to their brother-in-law for 10 cents on the dollar. Closing the deal could be problematic unless the same lender finances the new buyer.

Still, lenders hate REO for all the right reasons. If they know they are going to experience a loss anyway, it may make sense to limit their loss severity by pressing their current debtors into forced labor.

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