When you think about it, when a lender has a non-performing asset, which is to say a mortgage that isn’t being repaid by the borrower in a timely fashion, they have a big headache. They face a protracted judicial process of foreclosure which can take years. In the interim, they may have the collateral, which is the property, fall into disrepair or neglect by a borrower with limited financial resources. The borrower might even move out, leaving an abandoned home with frozen pipes, squatters, or vandals in the picture. The legal fees of foreclosure and the expense of repairing a neglected or vandalized vacant house can be significant.
It is incumbent on the lender to minimize their loss.
As I have heard many times, the lander doesn’t want your house.
They aren’t in the real estate management business.
To that end, banks will often hire preservation companies to change the locks and winterize properties that have been abandoned in anticipation of repossessing the property. The small print of the mortgage terms allow that.
To muddy up the waters even more, if the lender finally does foreclose on a property, they may (and often do) have an additional expense of evicting the occupant (typically the former owner, or the foreclosed borrower). Sometimes in a short sale, but often in a foreclosure, the bank will try to move things forward by offering the foreclosed borrower “cash” for their “keys.” They will offer moving expenses and other compensation to save the time and money of dealing with an occupant who either cannot or will not easily move. I have seen the lender give the borrower $3,000 and I have seen the occupant get $40,000. I have seldom seen more than $6-7,000.
But the point is to get the occupant moving in a less confrontational or adversarial manner. It is an incentive to move, and it certainly isn’t an incentive to go south on the mortgage. The banks view it as the cost of doing business, and it does pragmatically help someone in financial distress move when they have no other resources to count on. Cash for keys saves the bank time and money. That’s why they do it. They don’t do it because they are nice people, they do it because it is good for business.
