FDIC Recommends Banks Paying Mortgage Holders Who Are Underwater $20,000+ to Walk Away

In its attempt to save the housing industry, government regulators have come out with one dumb bailout after another. The FDIC may have topped them all however in their recent proposal to pay borrowers up to $20,000 to walk away. 

The five biggest US mortgage servicers were told this week at a private meeting with regulators to consider paying delinquent borrowers up to $21,000 each as part of a broader settlement of the foreclosure crisis.
People who attended the meeting, chaired by the Federal Deposit Insurance Corporation on Monday, said the industry-wide “cash for keys” program would involve the biggest servicers, led by Bank of America, paying borrowers as an incentive to leave their homes.

Banks would pay borrowers who are more than 90 days behind on mortgage payments up to $1,000 to seek independent financial advice and up to $20,000 in cash as a “fresh start” payment towards living costs in a new home. They would have to vacate their properties quickly and leave them in good condition.

With 23% of all mortgage holders now underwater, what motivation would any of these mortgage holders have to continue paying their mortgage if they could be paid $20,000 in cash if they quit paying their mortgage for several months and walked away? 

If the FDIC is looking to punish lenders, this certainly ought to do it. I don't this is the answer. Maybe a principal reduction for borrowers who can't hold on or easing up financing restrictions would be better options, FDIC. 

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