Some of you may have heard that Citigroup made an announcement today. That announcement really comes as no surprise as the lending industry continues to dig it’s way out of the current crisis it is in. The announcement: Citi is launching a new “Foreclosure Alternative” program that allows homeowners in default to remain in their homes for an additional 6 months, provided that they hand over the deed to their property after the 6 month time frame is up. For some, this would seem like the answer to their prayers, at least a short-term answer. The homeowner is still required to maintain their utility bills, but Citi promises to pay at least $1,000 in relocation expenses and will keep an open mind about other expenses as well.

Citi will start the pilot for this program this week in the following state: Texas, Florida, Illinois, Michigan, New Jersey and Ohio. Says Citi’s top mortgage executive Sanjiv Das, “Why should we all go through the foreclosure process and evict people?” Das added that avoiding the costly foreclosure process is “less painful for our borrowers as well as for us.” Citi’s program is an effort to counter a growing trend in which many homeowners who owe more than their home is worth in today’s market opt to simply walk away. Many feel that market values will not come back, at least in the foreseeable future. This trend is reflected in data from Moody’s Economy.com, citing that almost a third of all homeowners owe more on their home than it is currently worth.

The announcement of this programs and it’s approach is similar to the program announced from Fannie Mae at the beginning of November, 2009. In the Fannie Mae program, homeowners transfer the title of their property back to Fannie Mae, then turn around and rent the property back at current market rates. The homeowners are allowed to rent on a month-to-month basis for up to one year. There has been a lot of speculation about how effective this program will be, citing that it will only prolong the inevitable and that the majority of homeowners problems are more than a temporary in nature. John V Back of Valley Accounting in Phoenix stated, “The Fannie Mae Deed for Lease Program has some merit in that it allows homeowners to stay in their homes as market-rate renters for up to one year after losing ownership of the homes. The merits of the program are curious to me because while the program does allow the homeowner to avoid the disruption of moving right away and it reduces their monthly payment down to a market rent amount; it is only putting off the inevitable move to more affordable living arrangements. I would think the more logical way to handle this is to simply consider this a loan modification and let the homeowner continue to occupy and own their home on more affordable terms.”

The current crisis in the lending industry is complicated, to say the least. It will take time, flexibility, and many different attempted strategies to get back to ground zero. As a last piece of advice to homeowners, Mr. Back says: “gather all of their loan documents and have your lawyer and your CPA evaluate insolvency, recourse debt provisions, gain or loss on the transaction for investment properties and tax planning before they enter into any transaction with the lender. It is often one of the biggest financial decisions, with the biggest income tax consequences that anyone will ever face.”