How The National Foreclosure Settlement May Affect You

On April 6, 2012, a federal judge approved the $26 billion foreclosure settlement agreed upon between the nation’s five largest banks and 49 state attorneys general and the District of Columbia. Oklahoma is the only state that did not participate in the settlement and settled individually with the five banks in early February.

This settlement could help the nation’s hardest hit mortgage borrowers who may see some significant relief on their mortgage payments. The participating banks will reduce the principal on loans held by underwater homeowners, refinance some mortgages to today’s low interest rates and try to compensate borrowers who have lost their homes due to improper foreclosure practices. These banks have also agreed to change how they approve and handle future foreclosures.

What is the settlement agreement and how soon will start affecting the target borrowers?

The mortgage lenders and loan servicers have committed to $17 billion to reduce principal for borrowers who owe more than their home’s current value and are behind on their payments.

Four of the banks will average the amount of principal reduction at $20,000 per borrower and Bank of America will average $100,000 or more per borrower.

$3.7 billion will go to refinancing mortgages for borrowers who are current on their payments. This will help them to take advantage of the current low interest rates available.

The five banks will also pay out $5 billion to the federal government and the states. This fund will provide payments of $1,500-$2,000 to foreclosure homeowners who have lost their homes to foreclosure. Other funds will be paid to homeowner advocacy organizations to help borrowers facing foreclosure and servicer abuses.

$1billion will be paid by Bank of America to the Federal Housing Administration to settle charges that its subsidiary, Countywide Financial, defrauded the housing agency.

All banks have agreed to eliminate robo-signing and to use proper and legal procedures when putting homeowners through the foreclosure process. The banks have also agreed to end servicer abuses and to include principle reductions more often in their mortgage modifications programs.

Which Mortgage Lenders are taking part in this settlement?

Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial are the current five participants. Additional loan servicers may join the settlement at a later date which would increase the settlement.

The Federal Housing Finance Agency, which oversees the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac are not part of the settlement and will not allow any balance reductions for loans insured by the companies under the settlement.

If you lost your home to foreclosure, how you qualify for a payment?

You may be eligible for a payment of up to $2,000 if you were foreclosed on between 2008 through 2011. If you think you qualify, please contact your bank now.

If you also think you may qualify for a principal reduction or refinanced mortgage, please contact your lender/servicer and ask them to review your case now. The banks have said that they will start to identify borrowers who quality for the deal quickly so call your lender/servicer now!

If Individual borrowers take the offered money they will not give up any right to sue.

Under the Foreclosure Settlement, all principal reduction, refinancing and payments must be completed with a three and a half year period. The state attorneys general and the Dept. of Housing and Urban Development want the majority of settlement action to be completed within 12 months.

As for tax considerations, the resulting gain your house principal is reduced in 2012, it will not be subject to income tax. The Mortgage Debt Relief Act of 2007, which expires at the end of 2012, allows taxpayers to exclude income from the discharge on their principal residence. If this Act is not extended into 2013, there may be a taxable event if principal reduction on a home occurs thereafter.

Hopefully, the new rules and regulations the banks have agreed to under the settlement, will have a positive influence on proper future mortgage borrowing practices.