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Foreclosure Settlement Finalized, Now What?

The $26 billion foreclosure settlement between the nation’s five largest banks and attorneys general from 49 states and the District of Columbia was finally finalized by a federal judge on Thursday.

The settlement aims to make it possible for roughly two million borrowers to see a significant reduction in their mortgage payments with principal reductions for underwater borrowers, refinancing on some mortgages to lower interest rates and compensation to those who lost their homes due to improper foreclosure practices.

CNNMoney.com has a complete list of provisions the banks agreed to and has outlined what it means to you, the homeowner.

As reported by CNNMoney.com, the main provisions include:

  • The banks and servicers have committed at least $17 billion to reduce principal for borrowers who 1) owe far more than their homes are worth 2) are behind on payments. The amount of principal reduction will average about $20,000 per borrower in the cases of four of the banks. The Bank of America reductions will be even steeper, averaging $100,000 or more, according to spokesman Rick Simon.
  • Another $3 billion or more will go toward refinancing mortgages for borrowers who are current on their payments. This will enable them to take advantage of the historically low interest rates that are currently available.
  • The banks will pay $5 billion to the states and the federal government, the only hard money involved in the deal. Out of that fund will come payments of $1,500 to $2,000 to homeowners who lost their homes to foreclosure. Other funds will be paid to legal aid and homeowner advocacy organizations to help individuals facing foreclosure or experiencing servicer abuses.
  • Another $1 billion will be paid directly by Bank of America to the Federal Housing Administration to settle charges that its subsidiary, Countrywide Financial, defrauded the housing agency.
  • The exact amount of the payments will depend on how many people participate in this part of the settlement. They will share equally in a pool of $1.5 billion. The U.S. Department of Housing and Urban Development expects about 750,000 former homeowners to take part.
  • In addition, the banks agreed to eliminate robo-signing altogether and to use proper and legal procedures when putting homeowners through the foreclosure process. They also agreed to end servicer abuses, like harassing delinquent borrowers for payments, and to include principal reductions more often in their mortgage modifications programs.

Which banks are participating?

Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial are taking part in the settlement.

Loans owned or backed by Fannie Mae and Freddie Mac are not part of the deal nor are loans insured by the Federal Housing Administration eligible.

If I take the money, what rights do I give up?

Individual borrowers do not give up any right to sue.

As part of this deal, state attorneys general gave up the right to sue the mortgage servicers for foreclosure abuses arising out of the robo-signing scandal. However, they reserve the right to sue — or press charges for criminal behavior — if they uncover improper acts when the loans were originated or when they were securitized.

Would I have to pay taxes on the principal reductions or the pay-outs?

If the principal is reduced in 2012, it will not be subject to income tax.

That’s because the Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. The act is scheduled to expire at the end of this year, however.

So if the act is not extended and the principal reduction occurs in 2013, borrowers may be on the hook to pay taxes on the settlement amount.

It’s not clear whether you would have to pay taxes on the $1,500 to $2,000 payout. The IRS declined to comment on the question.

Check out further details about the settlement at CNNMoney.com

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