Articles Posted in Loan Modifications

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A reverse mortgage is a financial device where borrowers can receive money based off the amount of equity they have in their home. Reverse mortgages offer a tool for senior citizens to supplement their retirement income. To be eligible for a reverse mortgage, a borrower must be at least 62 years of age. There are also restrictions regarding the residence. To name a few: it must be the borrowers’ primary residence, it must be in good condition, it must be paid off or almost paid off and it must be a single family home.

Unlike a traditional mortgage, a borrower in a reverse mortgage receives payments instead of making monthly payments back to the lender. This is true as long as the borrower lives in the home. Payments from a reverse mortgage can be in the form of one-time upfront payments or in monthly payments to the borrower. The borrower is however, still responsible for HOA fees, property taxes and insurance on the home. The balance of the loan becomes due once the home is sold or the borrower passes away.

Reverse mortgages are an alternative means to tapping the equity a borrower has in their home. More conventional options include selling the home, refinancing or taking out a home equity line of credit. However, these options may not be available or suitable if the borrower does not wish to move or is otherwise not qualified to obtain additional financing.

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These days, it is not uncommon for mortgages to be sold or transferred. Many mortgages start out with one company and are almost immediately transferred to a different bank or loan servicing agency. In fact, most homeowners who finance through a mortgage, are probably not paying the same company who originally provided the loan. You may be asking yourself, why does this happen, and how does it affect the average homeowner?

Anyone who has applied for a mortgage can attest to the fact there is no shortage of paperwork to fill out during the process. Very few people actually take the time to read the fine print. In fact, most simply verify the important terms then sign and initial as applicable. However, in most, if not all mortgage contracts, there is a clause stating whether or not their mortgage will be sold or transferred. This language is required by Title 12 Chapter 27 § 2605 of the U.S. Code.

Generally speaking, there are two parts of a mortgage that can be transferred or sold. The two components do not even have to be owned by the same company. However, to most homeowners the distinction is non-existent except in name. The first component is the actual mortgage, also called the note. The note is what sets forth the terms of loan, including the amount owed and when. The note is almost always secured by a deed of trust on the physical property. In Arizona, this is what allows banks to foreclose on homeowners who fail to pay their mortgages. This is what’s known as a non-judicial foreclosure.

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The Mortgage Forgiveness Debt Relief Act of 2007 (“the Act”) has been extended until January 1, 2014. The Act exempts most homeowners from paying federal income tax on debt forgiven by lenders through foreclosure, short sale or loan modification.

The Act was set to expire on January 1, 2013. The extension of the Act is expected to impact the market for short sales. If the Act had not extended, then a seller would pay income tax on the amount of debt forgiven by a lender in a short sale. As a result, many homeowners may have been reluctant to attempt to do a short sale and pay a significant tax on the forgiven debt had the Act not been extended.

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On February 9, 2012, the attorney generals from all 50 states entered into a settlement agreement with five of the largest mortgage lenders in the country. This settlement agreement was subsequently submitted to federal court, and was approved on April 4, 2012. The five mortgage lenders agreeing to the settlement were Bank of America, Chase, Citibank, GMAC/Ally, and Wells Fargo.

The settlement targeted changes in these lenders foreclosure practices which were done in contravention to state and federal law. Included among those practices were the now infamous “robo-signing” (in which mortgage lender’s employees signed foreclosure affidavits under oath without reviewing the accuracy of the sworn statements), and dual-tracking (the practice of offering loan modifications while simultaneously proceeding with foreclosure). These practices, and others identified in the settlement agreement, are believed to have led to many improper foreclosures and exacerbated the housing crisis.

The settlement also provides monetary relief aimed at redressing several different issues. First, the settlement provides $17 billion to assist borrowers to stay in their homes. No less than 60% of this amount will be utilized to reduce the principal balances on loans now in default or at risk of default. Second, $5.2 billion will be allocated to facilitate short sales, payment forbearance for those caught between jobs, relocation assistance, remediation for blight, and even waiving deficiency balances.

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The Making Home Affordable Program is a government-sponsored refinance and loan modification program to help struggling homeowners keep their home. The Making Home Affordable Program includes the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP). The Making Home Affordable Program also includes the Home Affordable Foreclosure Alternatives (HAFA) Program for individuals who wish to transition to more affordable housing. 

Home Affordable Modification Program (HAMP)
To qualify for HAMP, a homeowner must:
• Own a one to four-unit home that is their primary residence
• Have received their mortgage on or before January 1, 2009
• Have a mortgage payment (including taxes, insurance, and homeowners’ association dues) that is more than 31 percent of their gross (pre-tax) monthly income
• Owe an amount that is less than or equal to $729,750 on their first mortgage for a one-unit property (there are higher limits for two or four-unit properties)
• Have a documented financial hardship

To apply for HAMP, homeowners must submit an Initial Package to their mortgage servicer, which includes:
• A complete Request for Modification and Affidavit
• A complete Tax Authorization Form (IRS Form 4506T-EZ)
• Proof of Income
Mortgage servicers will determine whether homeowners qualify for a HAMP modification. Homeowners who qualify must complete a trial period of three or four months to demonstrate that they will be able to make reduced payments on time before their mortgage will be permanently modified.

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The Department of Housing and Urban Development recently announced a $25 billion settlement between the five largest banks in the U.S. to address mortgage loan servicing and foreclosure abuses. The settlement includes Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. Most of the $25 billion settlement is supposed to go toward reducing mortgage payments for troubled homeowners. 

There are two big ways this settlement differs from previous programs. For one, it’s the only large-scale program that includes principal reductions. Banks will be required to do partial loan forgiveness. Secondly, compliance from the lenders is mandatory, which distinguishes it from other programs that have been voluntary. 

Bank of America Home Loans, one of the five major banks involved in the settlement, has purportedly been reaching out to customers who may be eligible for forgiveness of a portion of the principal balance on their mortgage under the terms of the settlement. 

Bank of America began sending out letters in a targeted outreach to more than 200,000 potential candidates for this assistance. The bank estimates average monthly savings of 30 percent on mortgage payments of customers who qualify for this program.

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