Pat Dollard

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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 [BAC 13.34 -0.14 (-1.04%) ], 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.

Fannie Mae and Freddie Mac, the government-sponsored mortgage guarantors, and private investors who own mortgage loans were also mentioned as possible providers of cash in the scheme. Eligible borrowers would likely include some, but not all, of the 4.8 million who are more than 90 days in arrears.

Sheila Bair, FDIC chairman, raised the idea but people involved said it was not an official government proposal and was rejected strongly by some of the banks.

Officials and bank executives discussed other options at the meeting, which had been requested by some in the industry. The FDIC and the servicers declined to comment. Some banks already pay some borrowers to vacate their homes because it proves cheaper and quicker than a court-ordered eviction but payments are generally much smaller.

Foreclosures were halted by banks across the country when it emerged that many of the legal documents were being completed by so-called “robo signers.”

The Department of Justice; state attorneys-general; banking regulators, including the FDIC; the Treasury; and the new Consumer Financial Protection Bureau are among the agencies trying to come to a settlement with the industry. A combined penalty of about $20 billion has been discussed, with one idea to use the money to write down the outstanding debt of struggling homeowners.

However, prospects for a single “mega settlement” have worsened because officials disagree on the level of penalty and whether money raised in fines should be used for a principal writedown. The banking regulators, who do not agree among themselves, are nonetheless keen to come to an agreement quickly.

One way through the gridlock, which has been discussed among officials, is giving the servicers a menu of options for settlement, which might include principal writedown or a “cash for keys” scheme.