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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

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.”

Fannie wants you to be a landlord

Fannie Mae wants to offer nearly 2,500 distressed properties to investors in bulk to rent them out. The offer will be available in the eight hardest-hit locations including Atlanta, Phoenix, Las Vegas, Los Angeles/Riverside, and three Florida regions, and will include all types of housing units, from single-family homes to co-op apartment buildings. The offer stipulates that investors will need to purchase all of the homes that are for sale in a given metro area. In Atlanta, that’s as many as 572, while in Chicago it’s 99.

Edward J. DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae, hopes this initiative will reduce taxpayer losses and stabilize neighborhoods and home values by shifting vacant foreclosure homes to more private management of properties.

In fact, real estate consultant John Burns told CNN Monday that he expects the sales to help bolster the housing market. By taking these distressed properties off the market, it will prevent them from further weighing on home prices in surrounding neighborhoods, said Burns. It will also add to the rental property inventory, which should help offset recent rent hikes.

CNN Monday reports that investors interested in purchasing these homes will have to meet strict guidelines: Investors will need to post security deposits in order to bid on the properties and must prove that they are financially stable. They must also have property management experience and have strong ties to the local community, such as a history of working with local development organizations.

Buyers will be required to continue to rent out the properties to current tenants for as long as their leases last. Investors will also be required to rent the properties out for a specified number of years. The exact number of years has yet to be disclosed.

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.”

How the $25B Mortgage Settlement Affects Californians

February 14, 2012 Leave a comment

The federal government, 49 attorneys general including California’s Kamala Harris, and five the nation’s largest banks announced last week the approval of the $25 billion settlement that’s aimed at helping distressed homeowners and keeping them in their homes.

While much ado has been made around this much needed aid, homeowners everywhere are asking how this will benefit them and Californians specifically are wondering how they can cash in on their portion of the $18 billion granted to California.

First of all, not all borrowers will be helped – The settlement only covers loans owned and/or serviced by Bank of America, Wells Fargo, JPMorgan Chase, Citibank and Ally Financial. So anyone with a Fannie or Freddie loan is left out – which is equal to about 30 million mortgage loans.

The main provision in the settlement provides principal reductions on loans for people who are underwater and are behind or “almost behind” on their mortgage payments. According to the San Francisco Chronicle, “About $8.9 billion – or almost half of the $18 billion in borrower benefits California expects to receive – will reduce principal for an estimated 250,000 borrowers. That’s about $35,000 per homeowner.”

Homeowners who prove they have an economic hardship that makes it impossible for them to continue paying their mortgage are eligible for a principal reduction. The tricky part: This is only true for loans owned by the big five banks. Loans that are serviced by the big five but owned by investors may be eligible, but the investors have the final say and need to agree to the principal reduction. And again, loans owned or backed by Fannie Mae, Freddie Mac, the Federal Housing Administration or Veterans Administration are not eligible.

Another provision in the settlement includes restitution payments for those whose loan was serviced by one of the five banks, regardless of who owned it, and were foreclosed on between Jan. 1, 2008 and Dec. 31, 2011. Those homeowners are automatically eligible for a one-time payment estimated at $1,500 to $2,000. The San Francisco Chronicle reports that “In California, about 140,000 people could share $279 million in payments. Nationwide, about 750,000 are expected to share $1.5 billion. These payments are supposed to punish servicers for robo-signing and other shoddy foreclosure practices.”

While homeowners will not have to prove they were victim of such practices to receive a payment, if they can prove they were wrongfully foreclosed on due to these wrongful doings, they can also pursue damages individually or in a class action – and if they can only expect a maximum of $2,000, it’s a likely course of action for many.

The rest of California’s settlement will be divided as follows, as reported in the San Francisco Chronicle:

  • California expects only $849 million – or 4.7 percent of the total benefits – for refinancing.
  • California anticipates that banks will devote $3.1 billion to help 23,000 homeowners do short sales.
  • California expects banks to put $3.5 billion toward “unpaid balances” on home loans, not necessarily deficiency judgments which are uncommon in California.

For more information, see oag.ca.gov or www.nationalmortgagesettlement.com.

Friday Foreclosure Story: San Bernardino Homeowner Wins Back Her Home

February 3, 2012 Leave a comment

San Bernardino homeowner Karen Mena is proof that foreclosure doesn’t have to mean the end.

Mena was foreclosed on but was able to stop eviction proceedings and cancel the foreclosure by fighting Bank of America for a loan modification that would make her home more affordable.

Los Angeles Times reports that consumer attorneys say foreclosure reversals like Mena’s could become more common as they learn to better exploit foreclosure errors.

Karen and her husband, a self-employed contractor, bought their house in 1996 and rode the upward wave of her home investment for nearly 12 years. In 2008, her husband lost his business as many contractors did during the housing bust and their two-income household was forced to survive on one income. She fell behind on payments and applied for a loan modification through her mortgage servicer, Bank of America and was granted a trial modification. She faced some unexpected expenses in February 2009 and missed a mortgage payment, breaching the terms of her agreement with Bank of America, voiding the trial modification.

Unable to make full payments on her mortgage, the Los Angeles Times reports a familiar story:

“Mena submitted her first application through the Home Affordable Modification Program in June 2009 and then again in July after she was told her paperwork was never received. A frustrating process ensued: She would fax financial documents to the bank and wait for weeks or months for word back, only to be told to send the information again because the papers were incomplete, missing or outdated. Mena kept some of her correspondence with Bank of America, a journal of letdowns and false hopes.

In August 2010, the bank began formal foreclosure proceedings against Mena. She reapplied for a loan modification. Her home was scheduled for sale at auction Dec. 6, 2010. The bank asked her for more documents.

She was caught in the gears of the bank’s dual-track process, where a lender continues to foreclose on a home even as it works with a borrower on modifying the home’s mortgage — akin to lining up the mortician as the patient checks into the hospital.”

Karen was soon informed by Fannie Mae – the investor behind Bank of America’s loan – that she no longer owned her home and was given the option to rent her home or accept a “cash for keys” agreement. Unsatisfied with either option, Karen remained in her home and weeks later she was informed by Bank of America that her trial loan modification had been approved.

“She faced a choice: Start making the trial payments or save her money in case she was evicted. Mena decided to begin making the payments, telling herself, “Let’s see what happens. This validates everything I have been trying to do.”

Still, Fannie Mae pressed on, taking Mena to court to get her out of the house. Mena replied with her own lawsuit, written with the help of a paralegal because she did not have enough money for an attorney.

The lawsuit makes a series of arguments accusing Bank of America and Fannie Mae of deception as well as questioning their authority to foreclose. A key contention is that she was accepted into a trial loan modification program even after she was foreclosed on.

But before that lawsuit could be resolved, Fannie Mae won the eviction case. She appealed and lost.”

The next day, an attorney with Bank of America informed Karen that the eviction never happened and BofA repurchased the loan from Fannie Mae and the foreclosure was eventually retracted

Karen is still working with Bank of America on an affordable mortgage modification through HAMP but as of now remains in her home.

Check out the Los Angeles Times for the full story.