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Principal Reductions: A Cure to the Crisis?

April 12, 2012 Leave a comment

After much debate, Fannie Mae and Freddie Mac will decide by the end of this month whether they will allow principal reductions on mortgages they back.

Fannie and Freddie have resisted calls to write down the balances on the loans in their portfolio, saying it would be too costly for taxpayers as the mortgage giants are government-controlled companies, regulated by The Federal Housing Finance Agency.

At the core of the debate is Ed DeMarco, acting director for the agency, who has said principal reductions would amount to an expensive taxpayer bailout of troubled homeowners. According to CNNMoney.com, the agency had originally decided against allowing principal reductions after internal studies showed that alternatives such as adjusting monthly payments or forbearing principal were more cost effective.

The Obama administration, however, has tripled the incentives it will pay to Fannie and Freddie for reducing principal under the Home Affordable Mortgage Program, or HAMP and has forced the agency to reconsider.

As reported on CNNMoney.com, Fannie and Freddie have about 3 million loans that are seriously underwater, according to company filings. But three-quarters of these homeowners are current on their payments and may not qualify.

The number of eligible underwater Fannie and Freddie loans could range from a few hundred thousand up to 750,000, according to estimates – a fraction of the total 11 million underwater borrowers in the U.S.

However, there is still debate on if this will fix the housing crisis.

While some economists state that this could be helpful in aiding the crisis, some experts still fear that allowing principal reduction will open a new wave of strategic defaults, where homeowners decide to stop paying their mortgages in order to benefit from modification programs.

Plus, at the end of the day, taxpayers will still be paying for principal reductions – whether taxpayer money comes from HAMP or from the open line of bailouts Treasury provides to Fannie and Freddie.

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Foreclosure Settlement Finalized, Now What?

April 11, 2012 Leave a comment

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

Mortgage Settlement Filed in Court This Week Still Leaves Homeowners Outraged

March 13, 2012 Leave a comment

The details of the multi-billion dollar mortgage settlement between 49 state attorneys general and the nation’s five largest banks were filed this week in court. However millions of homeowners will still be left without aid.

Proponents of the settlement estimate that roughly 1 million underwater homeowners will receive aid in the form of principal reductions and another 750,000 homeowners will be able to refinance their loans to lower interest rates. CoreLogic, however, states that this is just a fraction of the 11 million homeowners who are currently underwater.

CNNMoney.com reports:

“Principal reductions will also only apply to certain borrowers who have mortgages still held by the five major lenders: Bank of America, CitiBank, Wells Fargo, J.P. Morgan Chase and Ally Financial.

Borrowers who have a mortgage held by Fannie Mae or Freddie Mac — roughly half the market — are out of luck. Loans insured by the Federal Housing Administration are also ineligible.”

Unfortunately for many homeowners most loans are not retained by the original lenders. So if a borrower enters into a mortgage agreement with a bank, their loans are often sold to Fannie or Freddie and borrowers aren’t given a choice when their loans are sold.

Distressed homeowners throughout the country are outraged at the inequality the settlement offers. For the homeowners who bought responsibly and made their payments faithfully, the unfairness comes in the fact that their tax dollars are paying for government-funded programs to prevent foreclosures while irresponsible borrowers accrue the benefits like the ones offered in the settlement.

Additionally, some borrowers may qualify for much larger reductions than others, as well.

CNNMoney.com states:

“Bank of America, for example, said it will slash mortgage balances by an average of $100,000 or more for roughly 200,000 homeowners. The goal, according to BofA, is to reduce the amount owed on the home to 100% match the current market value. Meanwhile, the other four major mortgage lenders, CitiBank, Wells Fargo, JPMorgan Chase and Ally Financial, are expected to reduce qualified borrowers’ principal to between 115% and 125% of the value of their homes — an amount that the Department of Housing and Urban Development said should average about $20,000.”

Changes to HAMP Can Help You Avoid Foreclosure

February 1, 2012 Leave a comment

The Obama administration is taking another swing at improving its main foreclosure prevention program, expanding eligibility for its Home Affordable Modification Program (HAMP) to borrowers with higher debt loads. It will also triple the incentives it pays banks that reduce principals on loans.

The program, which was initially set to expire at the end of this year, has also been extended to December 2013. Additionally, the administration will also offer incentives to Fannie Mae and Freddie Mac to reduce principal on loans which previously was only offered to private lenders and banks.

According to CNN Money, the changes to HAMP which were announced last week at a press conference, include:

  • Expansion of eligibility: HAMP was designed to bring the debt ratio of mortgage borrowers down to 31% of their incomes. Those whose mortgage payments were already below that level had been ineligible for a modification. They may qualify now. The new guidelines will allow for a more flexible approach that takes other debt into account when calculating debt-to-income ratios.
  • Extension of eligibility to owners of rentals properties: The old HAMP rules applied solely to owner-occupied homes but now those who own rental properties may also qualify for a HAMP modification.
  • Triple balance-reduction incentives: The new HAMP will pay between 18 cents and 63 cents for every dollar that lenders take off the mortgage principal, up from between 6 cents and 21 cents.
  • Pay Fannie and Freddie the same incentives: Currently, Fannie Mae and Freddie Mac do not offer principal reduction plans as part of their HAMP modifications. To encourage this assistance, Treasury said it will pay the same principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.

The changes to HAMP do not take effect until the end of April, but the Treasury recommends any struggling homeowners to seek foreclosure prevention counseling immediately to learn their options and determine their best course of action.

Negative Equity

December 1, 2011 Leave a comment

Often referred to as “Underwater,” negative equity, as it applies to mortgages, occurs when the value of a home used to secure a loan is less than the outstanding balance on the loan.

Nearly 11 million properties nationwide had negative equity at the end of the second quarter of 2011, according to market research firm CoreLogic. For details on the number of underwater homes in your state, check out this infographic:

Find out how many homes are underwater in your state.