A word on the HAMP program

Since the beginning of the recession in 2008, loan modification programs have been available primarily through the Home Affordable Mortgage Program (HAMP). If a homeowner was unable to quality, the individual mortgage company could offer its own programs.

Normally, the goal of a modification is a lower monthly payment through reduced interest rates, elongating the term of the loan, principal balance reduction, or a combination of all. Our firm has helped clients since the downturn’s beginning with modifications. We have seen a tremendous amount succeed through the lowered interest rates and/or lengthening the loan. Seldom, however, did lenders reduce principal balances. But now they are. Over several months, we have seen an uptick in this remedy, sometimes several thousand dollars or even tens of thousands in reduced balance. We have seen eliminations of entire second mortgage balances.

You may have heard of the settlement five banks reached with the federal government, called the New National Mortgage Settlement. In February 2012, the federal government and 49 states (Oklahoma did not participate) entered into a settlement with the country’s five largest loan lenders: Ally, Bank of America, Citi Bank, JPMorgan Chase, and Wells Fargo. In the settlement, $25 billion is set aside for mortgage relief to underwater homeowners, $17 billion of which for loan modifications and principal reductions.

As we watch the effect of this settlement unfold, we can only assume it will further benefit the homeowners who qualify though they must be borrowers of the settling banks or servicers. In a later Blog entry, focus on eligibility will be discussed.

–Contributed by Michael P. Dickson

Taxes and loan modifications: what’s the impact?

How does a loan modification effect a person’s taxable income?

1.      The general rule is that when debt for which a person is liable is canceled or forgiven, the canceled amount must be included in a party’s reported income.

Generally, if a debt for which a person is personally liable is forgiven, the forgiven amount must be included in that person’s income.   The IRS defines debt to include any indebtedness for which one is personally liable, or subject to which one holds property.  If a person is not personally liable for a debt, the cancellation income will need to be included if a person retains the collateral and either: (1) the lender offers a discount for the early payment of the debt, or (2) the lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

Taxes2.      There is an exception to the general rule for debt incurred to finance the purchase, construction or substantial improvement of a person’s residence.

A person can exclude canceled debt from income if it is qualified principal residence indebtedness.  Qualified principal residence indebtedness is any mortgage a person took out to buy, build or substantially improve his or her main home.  The mortgage must be secured by the main home.  A person’s main home is the home where he or she ordinarily lives most of the time.  A person may only have one main home at any one time. The IRS has not provided guidance on what it considers a “main home,” but does say it will look at the facts and circumstances in every case.  A person is limited to excluding $2 million of qualified principal residence indebtedness.  If a person excludes canceled qualified principal residence indebtedness and continues to own the home after the cancellation, the person must reduce the basis of the home by the amount of the canceled indebtedness, but may only reduce the basis to zero.  The legal authority for this memo comes from IRS Publication 4681, except where other authorities are cited.

Photo: cooldesign

Forecosures to be “up” in 2011

According to a recent article, many experts are predicting that the foreclosure crisis will continue through 2011.  Currently, there are about 5 million borrowers at least 2 months behind on their mortgage payments.

Federal Trade Commission’s new rules limits up-front fees for loan modification services

federal-trade-commissionOn November 19, 2010, the Federal Trade Commission (FTC) issued 16 C.F.R.  Part 322, the Mortgage Assistance Relief Services Rule (MARS) concerning providers of mortgage relief service.  While many relief providers are legitimate, “At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results,” FTC Chairman Jon Leibowitz said.  Unlike an attorney assisting a client  in a loan modification or short sale effort, many mortgage relief services do not have a good understanding of the consistently changing rules and laws (both state and federal) involving mortgages and foreclosures and are not subject to code of ethics.

The MARS Rule is designed to protect distressed homeowners from these mortgage relief scams.  The most significant new rule under MARS is that non-attorneys offering mortgage relief services may not collect any fees until:

  1. The company has provided the consumers with a written offer from their lender or loan servicer that the consumer decides is acceptable.


  1. The company has provided the consumers with a written from the lender or loan servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.


  1. The company must remind the customer of their right to reject the offer without charge.


The MARS Rule also requires mortgage relief services to disclose key information to customers, including that the company is not associated with the government or the customer’s lender and that the lender may not agree to change the customer’s loan.   In addition, it the company tells the consumer to stop paying their mortgage, they must inform the consumer that this could cause them to lose their home and damage their credit rating.

In addition to the mandatory disclosures, the MARS Rule prohibits mortgage relief companies from making false or misleading claims about services, including claims about:

  • the likelihood of consumers getting the results they seek;
  • the company’s affiliation with government or private entities;
  • the consumer’s payment and other mortgage obligations;
  • the company’s refund and cancellation policies;
  • whether the company has performed the services it promised;
  • whether the company will provide legal representation to consumers;
  • the availability or cost of any alternative to for-profit mortgage assistance relief services;
  • the amount of money a consumer will save by using their services; or
  • the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Attorneys are exempt from this new rule as long as they are engaged in the practice of law, licensed in the state in which the consumer or home is located, and comply with the State’s ethics rules.  These are requirements that any practicing attorney should meet anyway.  In addition, and fees attorney’s collect will be placed in a client’s trust account and only withdraw for work performed in accordance with the retainer agreement the client has signed.

All provisions of the rule except the advance-fee ban will become effective December 29, 2010. The advance-fee ban provisions will become effective January 31, 2011.



Coming January 31st, FTC to limit loan modification scams

According to this article from the LA Times, the Federal Trade Commission (FTC) is starting to “clamp down” on phony loan modification companies.  Essentially, starting January 31st, loan modification companies will be prevented from getting upfront fees.  The evaluation by the FTC is simple: “[i]f a [loan modification company] seeks to charge you anything or collects money upfront, it will be in violation of federal law and subject to harsh penalties.”  For loan modification companies to continue, they will have to “contact your lender or servicer and give you a written proposal describing the key changes to your mortgage terms that the note holder [usually your lender] is willing to make before any more money can be collected in advance.”  In essence, loan modification companies are will be required to complete a pre-loan modification modification, before they can execute a final loan modification, at which point, they may be paid for their services.

The articles goes on to report that attorneys are largely exempt from the law:

The only exception will be for lawyers, who typically require retainers before they begin negotiating on a client’s behalf. They will be permitted to collect retainer fees for modification efforts but only if they deposit the money into “client trust accounts” under state bar regulations. Lawyers who charge advance fees also must be licensed by state authorities and be in compliance with state laws and regulations governing professional conduct.

This new regulation from the FTC is bound to frustrate many loan modification scams that seek to obtain funds from clients, but then provide nothing in return.  Fortunately, the FTC leaves in place law firms to handle upfront fees.

Bank of America resumes foreclosures

According to the LA Times, Bank of America is ending its temporary foreclosure “freeze” in 23 states.

Given that FHA has altered the waiting period for those who engage in strategic foreclosures (this applies to those who make the strategic decision to “walk away” from their home), seeking a loan modification might be the best option.  According to “HAMP” or the Home Affordable Modification Program: “Borrower eligibility is based on meeting specific criteria including:


1) borrower is delinquent on their mortgage or faces imminent risk of default
2) property is occupied as borrower’s primary residence
3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties. 

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:

  • First, reduce the interest rate to as low as 2%,
  • Next, if necessary, extend the loan term to 40 years,
  • Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

Note: Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment.”


Foreclosures in Seattle spiked in June

This blog post from the Seattle Bubble Blog is quite informative about the most recent foreclosure assessment for the Seattle area.  Perhaps we are starting to see the second waive of foreclosures?

Though I’m sure we will eventually turn this market around, it seems to be clear that we are in it for the long haul.  It does not help with the recent news that Colliers closed its offices in Tacoma, and GVA Kidder Mathews intends to drop its affiliation with GVA (national brand/presence) in the coming months.

One can’t help but wonder whether or not the days of consistent 6–9% annual home appreciation are gone…at least for the foreseeable future.

Loan modifications for a second mortgage: what are my options?

Often times, people who have second mortgages believe they are essentially shut out from the loan modification option.  This may not be true.  The government has a program which may assist those who wish to modify their current loan, but who also have a second mortgage.  This article discusses the options in general detail.

BSpencerhomeFor even more information, look at the government’s website here.

Congress grills banks for their loan modification practices

According to this article from Reuters, banks are still hesitant to carry through with loan modifications.

Walking away from a home, may cost you more than you think

According to this article, published on AOL’s real estate section, if a homeowner simply “walks away” from a mortgage, Fannie Mae is raising the stakes.  Here is a short quote from the article:

Here’s the breakdown for eligibility depending on how you got out of your last mortgage:
Deed-in-Lieu of Foreclosure> — reduced from four years to two years if you can put down 20 percent on your house, four years if you can only put down 10 percent.

Preforeclosure Sale — remains at two years if you can put down 20 percent, four years if you can only put down 10%.

Short Sale — will be the same as pre-foreclosure sale. Currently there are no set rules for short sale.

Strategic Default (Walk Away) — seven years.