Don’t Miss the Boat
Starting this summer, we have been seeing more loan modifications with principal reductions. Yes, you read that correctly. The loan modification that came in this morning was from Wells Fargo Home Mortgage and includes a principal reduction of $295,000 leaving a new principal balance of $290,000 on a primary residence that assessed at $285,000. This is an immediate principal reduction, no strings attached. We are also seeing principal forgiveness earned over three years and principal forgiveness on lines of credit.
What is causing the change in heart by the lenders? It is the National Mortgage Settlement (“Settlement”) which started on March 1, 2012 and continues to September 1, 2016. Servicers covered by the Settlement are Ally Financial, Inc. GMAC Mortgage, Residential Capital, Bank of America, BAC Home Loans Servicing- f/k/a Countrywide Home Loans Servicing, Citigroup, Citibank, CitiMortgage, JPMorgan Chase and Wells Fargo Bank. Fannie Mae and Freddie Mac loans serviced by the above lenders are not eligible for benefits under the Settlement.
Under the Settlement, no borrower is “entitled” to a modification. However, servicers receive “credits” toward the value of the “Consumer Relief” they have committed to provide over 3 ½ years through loan modifications and principal reductions. The Servicers have committed to credits of over $16 Billion dollars under the Settlement.
Under the Settlement, “Consumer Relief” granted between March 1, 2012 and February 28, 2013 will receive a 25% bonus credit, so motivation exists for servicers to move quickly this first year.
Principal write downs will be more available on lower valued properties that are “more” underwater. The Borrower is also going to need to have adequate income, but still have a hardship. The settlement provides for principal reductions by at least 10% to achieve target of 31% of Debt to Income (DTI) and 120% Loan to Value (LTV). Under the terms of the Settlement, 85% plus of the first lien credits are to be for owner occupied loans within the conforming GSE limits. Loans are 30 days delinquent/imminent default; pre-modification LTV greater than 100% with post-modification target DTI of 31% and post modification LTV less than or equal to 120%.
If your house is really underwater and you really want to keep the home for the long term, I strongly urge you to apply for a loan modification/ principal reduction. You have nothing to lose. It is a huge amount of work, but if you are approved, it will be worth all the effort.
However, prior to accepting any loan modification/principal reduction, seek legal counsel. Every loan modification/principal reduction has the potential adverse personal liability and tax consequences. If there is a principal reduction, the lender will be required to issue a 1099c which will be considered ordinary income unless you meet certain limited exceptions. If there is a junior lien on the property, a principal reduction prior to a Chapter 13 filing may prevent you from being able to avoid the lien in bankruptcy.
In conclusion, this is a great opportunity to keep your home. However, this is a complicated area of the law. No final paperwork should be signed accepting any modification/ principal reduction without the advice of legal counsel. A real estate or bankruptcy attorney should be able to make to an analysis of your situation quickly which will allow you to decide if the modification is the right decision for you.
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© 2012 Joan Grimes