Planning Series : Underwater or Drowning? The Fed Just Threw a Life Preserver Your Way
No matter what your financial situation may be, no one likes to throw money at a bad investment. Many homeowners are facing the harsh reality that their home is no longer worth what it once was and that they owe more than the home is worth. In the last 24 months, this has been a big issue and with little help offered by lenders, many have been choosing to walk away from the home that is underwater.
Finally, some good news; the $26 billion foreclosure settlement has finally been given the green light, making it possible for roughly two million of the nations hardest hit borrowers to see a significant reduction in their mortgage payments.
Agreed to between the nation's five largest banks and attorneys general from 49 states and the District of Columbia, the deal settles charges of foreclosure processing abuses dating back to 2008.
Under the settlement, which was approved by a federal judge on Thursday, the banks will reduce the principal on loans held by underwater homeowners, refinance some mortgages to today's low interest rates and compensate those who lost their homes due to improper foreclosure practices.
The banks also agreed to change the way they handle and approve foreclosures. The group of state attorneys general claimed that banks lost important paperwork, cut corners and enlisted robo-signers to attest to facts they had no knowledge of on hundreds of documents a day.
The settlement, the details of which were first announced in early February, has been in the works for more than a year. Here's what the banks agreed to and what borrowers can expect in the days ahead.
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.
In the cases of four of the banks, the amount of principal reduction will average about $20,000 per borrower. 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 through 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.
The Federal Housing Finance Agency, which oversees the two government-sponsored mortgage giants, said it will not allow any balance reductions for loans insured by the companies under the settlement, defying pressure to do so from both the public and from policy makers.
These changes are already in place and the banks have said they expect to get started very quickly. The first step will be to identify borrowers who qualify for the deal. Most banks will reach out via letter to notify you if you qualify, but we can also be proactive and review your individual case with you and reach out to your bank.
Under the settlement, the principal reductions, refinancings and payments must be completed within three-and-a-half years. However, the state attorneys general and the Department of Housing and Urban Development want the bulk of the settlement actions completed within 12 months.
The cool thing is if the principal is reduced in 2012, it will not be subject to income tax. This is due to the Mortgage Debt Relief Act of 2007 that allows taxpayers to exclude income from the discharge of debt on their principal residence. However, the act is scheduled to expire at the end of this year 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.
In case you were wondering, the actual cost to the banks of the settlement should not discourage lending either. Only $5 billion of the $26 billion settlement will be a direct expense to the banks. The remainder will be the cost of modifying mortgages. Many of those modifications may be in the best interest of the banks since the alternative may be foreclosure, which costs banks more than loan modifications.
Utilizing our VQ Money platform and quarterly review process, VisionQuest is able to identify those clients with homes that may qualify for this program and will initiate the conversation around getting this ball rolling.