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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.

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

Harris Requesting Principal Reductions From Fannie and Freddie

February 29, 2012 Leave a comment

While exact details of the multi-billion dollar state settlement to help struggling homeowners are expected out this week, Fannie and Freddie have come under increasing pressure to grant principal reductions, especially since loans backed by the mortgage giants (roughly half of all mortgage loans) are not eligible for relief under the recent state settlement.

And Attorney General Kamala Harris is adding to the pressure.

The New York Times reports that Harris asked Edward J. DeMarco, the regulator who controls Fannie and Freddie, to suspend foreclosures until the Federal Housing Finance Agency, completes a promised review of its policy forbidding debt reduction for delinquent homeowners who owe more than their home is worth.

In a letter, which was sent on Friday and disclosed on Monday, she requests “a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers.”

Harris and others including, Massachusetts AG Martha Coakley and other high-profile politicians and housing analysts, argue that principal reduction is the surest way to prevent foreclosure. Yet DeMarco has a differing opinion stating that it would cost tax-payers too much.

From the New York Times:

“Proponents of debt forgiveness note that roughly one out of five Americans owes more on a home than it is worth, and that negative equity totals almost $700 billion. Reducing some of that debt will save families’ homes and save lenders money, they say, by reducing the number of foreclosures. In California, banks agreed to give $12 billion in debt reduction under the settlement, and the architects of the settlement hope that will pry open the spigot of debt reduction, which banks have been reluctant to do on a large scale.

For his part, Mr. DeMarco has said that while debt forgiveness would save taxpayers money in the long run by preventing foreclosures, it would not save as much as another type of loan modification called forbearance. With forbearance, a portion of the debt is suspended until the end of the mortgage term or until the house is sold. The homeowner’s payments are reduced but he does not regain an ownership stake in the home.

A recent letter to Mr. DeMarco from two Democratic members of the House Committee on Oversight and Government Reform took issue with his reasoning. It said that using the Federal Housing Finance Agency’s own analysis, principal reduction of Fannie Mae loans would save taxpayers more money than forbearance. It also questioned the assumptions underlying the agency’s calculations.”

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.

$25B Proposed Mortgage Settlement Breakdown

January 31, 2012 2 comments

The lengthy negotiations between state attorneys general and five of the nation’s largest services have produced a proposed multibillion-dollar settlement over alleged foreclosure and mortgage loan-servicing abuses. The deal could be finalized by early February but many are still asking how this settlement would benefit them.

While terms could change, an early draft of the settlement shows little hope for those who lost their home to foreclosure. USA Today has details from both sides of the negotiations and breaks down what it’s likely to mean for borrowers and the housing market.

From USA Today:

Q: How might $25 billion be spent?
A: Terms could change, but the pot is likely to include:

  • $17 billion for loan modifications. About 60% would go to reduce what people owe on their home loans. Other funds would be used to assist short sales, in which lenders agree to let borrowers sell homes for less than they owe, and to give unemployed borrowers a reprieve from making mortgage payments.
  • $3 billion to help homeowners refinance at about a 5.25% rate.
  • $5 billion in cash. About $1.35 billion would be distributed by states to eligible borrowers who were victims of loan-servicing abuses by one of the five servicers and lost their homes in foreclosure in 2008 through 2011. The rest would fund state and federal housing initiatives.

Q: If I take this payment, could I still sue if I felt I was wronged?
A: Yes, either as an individual or as part of a class action. It’s also possible you could get restitution from a national review of foreclosures underway among 14 large servicers, including these five. That review is being overseen by federal banking regulators.

Q: Who will get principal reductions?
A: Borrowers would have to be at least 60 days late on their mortgages as of a date that’s yet to be determined. They would also have to be underwater, meaning they owe more on their home than it’s worth. And their state and servicer would have to be participants in the settlement.

Q: Who won’t have any chance of a principal reduction?
A: That would be most borrowers, including anyone current on a mortgage and people with loans owned or guaranteed by a government entity, including Freddie Mac, Fannie Mae or the Federal Housing Administration. They hold about 56% of existing home loans, says magazine Inside Mortgage Finance.

Q: How much principal reduction are we talking about, and to how many borrowers?
A: Housing and Urban Development Secretary Shaun Donovan said in a recent speech that it could be 1 million borrowers. Numerous news accounts have said principal reductions would average $20,000.

But 1 million could be a high number, and $20,000 is likely to be low. The average underwater homeowner owes about $50,000 more than their home is worth, says economist Mark Zandi of Moody’s Analytics.

Q: Will I be able to apply for principal reduction or other help?
A: There won’t be a standard application process. But you’ll be able to request it from your servicer if you’re eligible to do so.

Q: What will servicers have to do differently?
A: Servicers will be more restricted in their ability to carry out a foreclosure while someone is pursuing a loan modification. They will also be expected to adhere to more consistent time frames, for instance, as to how long they have to inform borrowers of decisions regarding loan modifications.

Q: Why haven’t all states agreed to this?
A: Some attorneys general have complained that the banks won’t be contributing enough to compensate for the harm done.

Others don’t want the settlement to protect banks from future litigation, including how risky loans were packaged and sold to investors. Attorneys general in California, Massachusetts, New York, Nevada and Delaware have all expressed concern about the settlement talks.

Q: How tough are the potential settlement terms on the banks?
A: Not very, says Paul Miller, banking analyst at FBR Capital Markets. The banks will largely be modifying loans they own themselves and some they service for investor owners. By modifying loans, the banks may reduce their future default rates.

“The loan modifications would be something the banks probably would’ve done on their own anyway,” Miller says.

Rheingold says any settlement will seem inadequate against the trillions in lost equity that resulted from the unprecedented collapse in home prices. He says that the state attorneys general — who started this process — were “filling a void left by the Obama administration’s failure to adequately address the crisis.”

Check out USA Today for the full article and additional thoughts on how the settlement may impact you.

Fixing the Housing Market: The Principal of the Matter

January 26, 2012 3 comments

Housing analyst Laurie Goodman says it’s all about the principal when it comes to providing assistance to both lenders and borrowers in this housing crisis.

In a recent CNN Money article Laurie estimates 2.5 million homes have already fallen to foreclosure since the bubble burst, and another 4.5 million mortgage holders have given up paying and are likely to lose their homes. She also warns that more than 10 million of the nation’s 55 million mortgage holders could default by 2018.

So what does Laurie recommend to fix the housing market? She explains that efforts to-date have fallen flat because they only benefit the borrower in the short term and don’t benefit the lender at all – mortgage modifications for example “aren’t helping because they only extended payments or reduced interest rates and don’t fix the fundamental problem of unsupportable debt loads.”

Which is why she says that principal reduction on the mortgage note is the only way to provide relief to borrowers that also benefits lenders. She found that lenders that reduced the principal (or total amount owed) by an average of 26% were far less likely to have to foreclose, and they actually provided mortgage back securities investors higher returns.

However, many banks are refusing principal-reduction deals to avoid the immediate write-downs that would be required. Additionally, many mortgage servicers are refusing principal-reduction deals because their fees are tied to the amount of principal rather than to the ultimate payback to investors.

Laurie states that banks “are ridden with conflicts of interest” that pit them against the interests of borrowers and investors, and many of the rules in place now are extremely large-bank-friendly, but borrower- and investor-unfriendly.” But while the housing crisis stays stagnant, that may be changing as the Treasury Department and several state attorneys general are encouraging lenders to offer principal-reduction options and “shared appreciation mortgage” (SAM) modifications.

If you are a homeowner looking for debt relief to avoid foreclosure, we encourage you to speak with an attorney, who is familiar with the changing laws and options available for homeowners, who can fight to make sure you receive a deal in your best interest, not the bank’s.