National Mortgage Settlement-What it Means for Delaware Homeowners

In February 2012, the State Attorneys General from 49 States (excluding Oklahoma), and the federal government (HUD, US Dept. of Justice, U.S. Treasury, and the U.S. Trustee Program) announced a $25 Million settlement with the country’s five largest mortgage servicers (“the Big 5”):

  • Ally/GMAC
  • Bank of America
  • Citi
  • JPMorgan Chase
  • Wells Fargo

Delaware has received $45 million in relief for distressed borrowers, to help homeowners facing foreclosure with refinance and principal reduction, support homeowner assistance programs, educational outreach, and Delaware’s new mortgage mediation program.

Also, according to Delaware Attorney General Beau Biden’s Office, forms are being sent out this week to approximately 2,300 Delawareans who may be eligible for up to $2,000 in direct payments whose mortgage was serviced by one of the Big 5 servicers (above) AND who lost their homes to foreclosure between January 1, 2008-December 31, 2011.  Those eligible should receive their forms by October 12th. The deadline to file a claim is January 18, 2013 and claims may be filed online or by mail. Payment checks are expected to be sent out in mid-2013. If you believe you are entitled to file a claim for a direct payment under this Settlement, you may file your claim at the National Mortgage Settlement Claim Filing Site.

Refinance and Principal Reduction

The 5 largest servicers mentioned above have agreed to provide $17 Billion in loan modifications under three programs:

  • First Lien Principal Reductions
  • Second Lien Principal Reductions
  • Refinance Program

FHA/VA, Fannie Mae and Freddie MAC mortgage loans are excluded from these programs.

First Lien Principal Reductions

Wells Fargo, Citi and GMAC/ALLY have agreed to provide Principal Reductions to qualified homeowners with loans owned and serviced by them, only.  Bank of America and Chase have agreed to offer Principal Reductions to qualified borrowers with loans they service that are not only owned by them, but those which are also owned by investors that have delegated the authority to them to provide principal reductions.

Under the settlement, the Servicers that signed on to the National Mortgage Settlement (“the Big 5”) will generally receive a dollar-for-dollar credit for each principal reduction.  For example, for each dollar in principal reduced, the Servicer will receive a dollar credit toward the $17 Billion in principal that the Big 5 servicers agreed to write-down.  These Servicers will receive a special incentive for principal reductions granted during the first year of the Settlement.  70% of these principal reductions must be for loans under $725,000.

Minimum qualifications include:

  • under-water (mortgage loan balance exceeds the property’s value);
  •  at least 60 days delinquent as of January 31, 2012;
  •  Not sold at sheriff’s sale;
  • Not subject to a foreclosure judgment;
  • And the homeowner’s debt-to-income ratio must be 25% or more
  • Each Servicer may have other criteria

Homeowners with BofA loans that qualify for principal reductions as outlined above are subject to mandatory solicitation requirements, so please do watch out for information on this from Bank of America via Federal Express or Priority mail.  For Qualified homeowners with BofA-serviced mortgages with pending (not discharged) Chapter 13 or Chapter 7 bankruptcy cases are to be solicited through their bankruptcy attorney.  For our clients, we will be sure to promptly forward any correspondence we receive from your Servicer directly to you.

Even if your Servicer is not one of the “Big 5” Servicers  that signed on to the National Mortgage Settlement, we understand that  12 more servicers, including Ocwen and SunTrust, will consider offering principal reductions to qualified borrowers.  Please note that our office offers Loan Modification Services to our client.  We finance the loan modification legal fees through the Chapter 13 plan for our clients who have pending Chapter 13 bankruptcy cases.  Please contact us discuss your loan modification options.

Second Lien Principal Reductions

Bank of America is in the process of mailing out 150,000 notices to homeowners who qualify for 2nd Lien Principal Reductions under the National Mortgage Settlement, so please do watch out for these notices as well.  BofA will contact you – you cannot request this relief.  However, this program results in complete forgiveness of qualified 2nd liens, but you have the option of opting-out of this offer should you choose to do so.  Qualified debtors in Bankruptcy with 2nd mortgage loans owned and serviced by BofA are also being solicited, including those qualified borrowers whose cases have been discharged.

Homeowners with 2nd liens serviced by Wells Fargo, Chase, Citi, or GMAC/Ally are also eligible for modification relief.  The programs with these Servicers vary, but primarily occur when the first lien is modified under the National Mortgage Settlement, either by them or another Settlement lender.

Remember, even if your loan is not serviced by one of the “Big 5”, you may also be eligible to have your second mortgage discharged in Chapter 13 bankruptcy, if your first mortgage balance exceeds your home’s value.  Please contact us for more information regarding this, and read our blog “Eliminate Your Mortgage in Chapter 13 Bankruptcy”.

One very important cautionary note on principal reductions and debt forgiveness:  debt forgiveness is subject to income taxes.  For example, if your mortgage balance was $500,000, but your Servicer has agreed to reduce the principal balance to $300,000, the $200,000 “forgiven” amount will be deemed income, and subject to income taxes.   This is also the case for first lien Principal Reductions, as well as 2nd Lien Principal Reductions.  There are exceptions for this, including debt cancelled in bankruptcy, or debt cancelled while you are to the extent you were insolvent immediately before the cancellation.  There is also an exception, through 2012, for cancelled debt on your principal residence

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.  This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).

For advice on the tax implications for cancelled debt, please contact a tax professional, as well as the IRS Website.

 Refinance Program

As part of the National Mortgage Settlement, refinancing is available to first liens (owned by one of the 5 Servicers involved in the National Mortgage Settlement) of homeowners who are underwater on their mortgages, but CURRENT.  This program, which offers a streamlined refinancing of your underwater home loan,  is not available to borrowers in bankruptcy, or to those who have been in bankruptcy within the last 24 months.  But, if your bankruptcy has been discharged for more than 24 months, you may qualify.  Eligible borrowers will be contacted by the Servicers, but please do contact your Servicer if you believe you are eligible and have not been contacted.  Remember, Delaware homeowners must have an attorney in order to refinance, and our firm does provide real estate settlement services, so please Please contact us, and we will be happy to assist you with this.

 

About Cynthia L. Carroll, Esquire

Cynthia Carroll is Delaware Bankruptcy Attorney and owner of Cynthia L. Carroll, P. A. in Newark, Delaware. We help consumers eliminate debt and fight foreclosures through Chapter 13 and Chapter 7 Bankruptcy. We also help consumers AVOID bankruptcy, through Debt Settlements and Mortgage Loan Modifications, foreclosure defense and consumer protection law. We also handle Residential Real Estate Purchase and Refi Settlements. Ms. Carroll has been practicing law for over 18 years, a former Law Clerk with the U.S. Bankruptcy Court, and former Prosecutor for the City of Wilmington, Delaware. She is a member of the National Association of Consumer Bankruptcy Attorneys, an Associate Member of the National Association of Chapter 13 Trustees, and a proud graduate of Max Gardner's Bankruptcy Bootcamp. We are a Debt Relief Agency proudly helping consumers seek relief under the Bankruptcy Code.
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