FHFA announces principal reduction

Posted by kevin on May 6, 2016 under Foreclosure Blog | Be the First to Comment

Seven years into the mortgage crisis, FHFA finally announced a program that could reduce principal on residential mortgage loans. This has been a political hot potato. After the bailout of FNMA (Fannie Mae) and FHLMC (Freddie Mac) (collectively known as the GSE’s), Director DeMarco was dead set against principal forgiveness. He was supported by Treasury Secretary Geithner. President Obama said that he was in favor of principal forgiveness but it took him about 6 years to get off the schneid. First, he had to replace DeMarco with a more sympathetic Director, Congressman Mel Watt. Two years later, a new program.

But, it is far from a uuuuge program. It affects about only 33,000 significantly underwater mortgages according to reports in Housingwire and National Mortgage News. That’s the bad news. The good news is that NJ has the highest share of properties eligible.

Here’s the deal. The property must be owner occupied, and you have to have been behind at least 90 days as of March 1, 2016. So, no strategic defaults. Fannie or Freddie have to either own the loan or have guaranteed it. The outstanding principal balance must be no more than $250,000 and the mark to market loan to value (MTMLTV) must exceed 115%.

You still capitalize earnings, reduce the interest rate and extend the loan. But the last step is that if the MTMLTV is greater than 115%, you reduce the MTMLTV to 115%. That amount according to one article is forgiven. According to another article, it is put in a suspense account at 0% interest, and if the borrower makes all required payments for a given amount of time, that amount is forgiven.

What the GSE’s had was a principal forbearance program. Same calculations which should lead to the same monthly payment. However, the lesser of 30% of the unpaid principal balance or amounts greater than 115% of MTMLTV is put in a suspense account with 0% interest. So, say that amount is $30,000. It stays in the suspense account until you pay off the loan, sell or refinance. Then, you have to pay back the $30,000 as a balloon payment.

Some may say, too little too late. But, I say it is worth looking into.

If you think you fit into this program or what like to see if you do (or if you are looking for a mortgage modification) contact us at kh@kevinhanlylaw.com.

Forgiveness of Indebtedness Income- 2014

Posted by kevin on December 19, 2014 under Foreclosure Blog | Comments are off for this article

If you owe money to a bank, say on a mortgage loan, and the bank accepts a short sale which nets them 200K but you owe 300K, then you have 100K of what is called “forgiveness of indebtedness” (FOI) income for which you may be required to pay taxes. Historically, the primary methods of getting around FOI income and the related taxes were to file bankruptcy or prove that you were insolvent at the time. In 2009, because of the mortgage meltdown, Congress eliminated FOI income on short sales, deeds in lieu of foreclosure, etc of primary residences- but not permanently.

That law ran out at the end of 2013. This left some of my clients who did short sales, etc in 2014 in financial limbo.

Well, the recent budget bill which passed in Congress last week extended the law which eliminates FOI taxes on primary residence for 2014. That is good news. In addition, taxpayers can deduct mortgage insurance premiums paid in 2014- private and public. Newspaper articles indicated that Congress was pushing for 2 years on these bills, but the Administration held out for 1 year.

There is a payback, sort of. When Ed DeMarco was head of the FHFA, he stedfastly refused to allow principal reductions on mortgages owed by or sold to investors through FNMA, Freddie Mac, FHA, VA. The media lamented that if only the president could get his guy, Mel Watt, into the position of head of the FHFA, then the government loans could be subject to principal reduction. Well, Watt is in, but there is still no principal reduction on the government loans. Moreover, the Mortgage News claims that since FOI income tax relief is being extended, Watt can use that trinket to avoid principal reduction. Let’s see how that plays out.

Observations about Mods

Posted by kevin on February 22, 2014 under Foreclosure Blog | Comments are off for this article

How can you evaluate whether you are being offered a fair modification. At a very basic level, you must ascertain that it lowers your payments enough that it is affordable to you. But the analysis should go beyond that.

Our starting point is to look at the total payments over the course of the loan pre-mod and post mod? We determine that by comparing total payments under the original loan versus your total payments under the proposed modification. This can be a little complex because a good mod may reduce interest, suspend interest, increase the term, capitalize arrearages with a balloon payment and/or reduce principal. All these components need to be considered. I have many clients who believe that they got a bad deal because there was not a principal reduction. However, if your interest rate is reduced from 10% to 4%, that is a considerable savings over the remaining term of the loan (whether extended or not). Moreover, in cases where my clients have not received principal reduction, the servicer usually offers to capitalize arrearages, place that amount in a suspense account with 0% interest, and have that amount paid at the end of the term or at sale as a balloon payment.

Some of my clients say that is not a good deal. My answer is that it depends. Let’s look at two different scenarios. In both cases, the loan will be amortized over 25 years and the amortized amount is $200,000. In the first scenario, however, the capitalized arrearages are $200,000 while in the second scenario, the capitalized arrearages are $50,000. Remember, there is no principal reduction. The monthly payment of the amortized portion (which is your monthly payment) is the same in either scenario; that is, roughly $1056 per month for principal and interest. Taxes and insurance should be the same. So, monthly payments are the same. The glaring difference is that at the end of 25 years, Homeowner A owes the lender $200,000 while Homeowner B owes the lender $50,000. At face value, one would say that Homeowner A got the better deal, and in many cases that is the correct analysis. However, in our next blog, we are going to look at these scenarios in a little more depth. There may be more to this story.

New Bill in NJ- Mortgage Assistance Pilot Program

Posted by kevin on April 25, 2013 under Foreclosure Blog | Comments are off for this article

New Jersey has not done too well during the mortgage crisis. Unemployment has been higher than the national average. Foreclosures have topped 150,000 since 2008 with a backup of probably another 100,000. The courts have been reluctant to find problems with issues like predatory lending, consumer fraud and the like. The NJ Home Ownership Security Act, a supposed strong consumer protection act, turned out to be a paper tiger because basically, it does not apply to 99.9999% of mortgages. The mediation program has run out of money. At the same time, NJ has the second highest foreclosure inventory in the country and NJ is one of only 4 states where foreclosures were up in the last year.

Amid all this less than sterling news, I came across something positive. Assemblyman Troy Singleton from Mount Laurel proposed a bill (A3915) to create the Mortgage Assistance Pilot Program to be run by the New Jersey Housing and Mortgage Finance Agency (HMFA). The purpose of the program is to allow homeowners who are in default of a mortgage owned by HMFA to lower the prinicpal owed on the mortgage if the property is underwater (more is owed than the property is worth).

The specifics: Principal could be reduced up to 30% and interest could be reset to current market rates. For example, you owe $500,000 at 8% on a property worth $300,000. Under this bill , the principal could be reduced to $300,000 and interest (30 years fixed fully amortized) could come down to the low to mid 3’s. That could be a huge savings.

In return, the homeowner is required to retain ownership the property for 5 years, and upon sale, must share any appreciation with HMFA to the extent of the reduction (If the mortgage principal is reduced by 30%, HMFA gets 30% of the appreciation upon sale.) If the owner sells before the 5 year holding period, another 5% is tacked on HMFA’s share.

Back in 2009, I routinely included equity sharing as part of any settlement proposal that I made to a lender/servicer. It was routinely rejected. Now, it appears that the environment may be ready for such a concept. Besides the usual problems involved in turning a bill into law, my chief concern with A3915 is the scope of the legislation. Since the program only applies to mortgages owned by HMFA, how many homeowners will be able to get relief. If HMFA is going to go out and buy New Jersey mortgages to supplement its inventory, where is the money coming from? My concern is that A3915 will become another NJ HOSA- great on paper but of limited utility. Notwithstanding I commend Assemblyman Singleton for attempting to address a big problem here in NJ.

25 Billion Dollar Settlement-Revisited

Posted by kevin on September 11, 2012 under Foreclosure Blog | Comments are off for this article

A while back, I reviewed the terms of the 25 billion dollar settlement with you. My conclusions were that the settlement was a big victory for servicers who were getting off the hook for a myriad of bad deeds, but that I would have to wait and see about benefits to borrowers in New Jersey.

A report recently came out from the overseer of the settlement who claims that there has been some movement across the country on reductions of principal amounts due on first mortgages. This positive news has been echoed, to a degree, by confirming posts on the listserve of the National Association of Consumer Bankruptcy Attorneys. But most of those posts came from attorneys out West.

I had not heard any news of principal reductions on first mortgages in NJ. But that does not mean that it is not happening. So, I reached out to attorneys on both sides, mediators and HUD counsellors to get an idea of what types of settlements are available. To my disappointment but not surprise, I did not hear much about modifications involving reductions in principal on first mortgages. What the lenders and their servicers are offering are deep discounts on or forgiveness of second mortgages, usually on properties that are underwater.

Big deal! Prior to the settlement, you could negotiate, without too much difficulty, a 10% settlement of underwater seconds (sometimes even lower). The second lender, you see, is not in the driver’s seat. Under New Jersey law, the second lender may sue on the Note. But lenders do not waste their money on a useless judgment if the borrower is out of work or underemployed. Moreover, aggressive pursuit of a money judgment on a second may just force the borrower into bankruptcy. If the second lender does not sue on the note, it has three choices. Buy out the first mortgage- very expensive and makes no sense if the property is underwater. Get wiped out in the foreclosure. Or try to make a deal with the borrower. So, this is one of the few situations in recent residential mortgage foreclosure where the borrower has some leverage.

Well, if it is true that lenders are forgiving seconds, that is pretty good for the borrower who is getting the deal. She is not out the few thousand dollars that would have been paid to take out the second. But is it good for the aggregate of borrowers in NJ who are looking to reduce principal and modify into an affordable loan? I question that. The lenders, cynical as ever, are forgiving 50-100K equity lines where they would have received nothing in a foreclosure. What do the lender get, then? They get credit against, in the case of NJ, the $67 million obligation under the 25 billion dollar settlement. So foregoing $5000 saves them from giving a $50,000 or $100,000 reduction in principal on a first.

Clearly, the lenders are following the letter but not the spirit of the 25 billion dollar settlement.