Amazing What A Lawsuit Can Accomplish

[MountainDon]

For struggling homeowners, it was a blockbuster. Bank of America on Wednesday announced a new program aimed at reducing mortgage principal for homeowners that owe more than 120 percent of their home's value. Yes, you heard right: The bank will actually reduce principal owed for underwater borrowers and those with so-called negative amortization loans.

That's long been viewed as the Holy Grail for helping underwater homeowners, but banks have been reluctant to do more than lower interest payments. The initiative, according to BofA, would aim to bring loan values back down to 100 percent of the home's value over five years.

Article in its entirety.

[waggin]

"The BofA program will offer an "earned principal forgiveness" up to 30 percent..."

Great!  My LTV is just shy of 30% right now, so I'll expect that "paid in full" notice from BofA on my mortgage in the mail any day now.  What?  That's not how it works? 

Seriously though, they're reducing the principal on negative amortization loans, but are they changing variable rates to fixed, reducing rates, and getting rid of the optional payment structure?  Without that, it's not going to change much in the long run.  What about other types of loans that are underwater?  If you have a conventional mortgage with a fixed rate and are underwater, it doesn't sound like this applies.  Sounds like more of a PR move to attempt to stave off potential regulation, as the article mentions.

[ScottA]

Will the IRS expect you to pay income tax on the forgiven amounts? I bet they will.

[eddiescabin]

The BofA change only involves people seriously delinquent on their mtg.  People who have struggled to keep current are out of luck!  It helps those who do not deserve help.  As for Scott's question, since 2007,  there  exists a bill that excludes this "forgiveen debt" as income and is thusly non-taxable http://www.irs.gov/individuals/article/0,,id=179414,00.html

Similarly, in CA. one cannot be held liable for any amounts "lost" due to the sale and reconveyance of a 1st purchase mortgage.  i.e. if you sell your home for less than the owed principal, you are not liable for the amount between the sales price and principal bal.  this is for a 1st/purchase money mtg ONLY, no refi, no home equity etc.

If you think about that last paragraph, you could have bought with zero down, solely on speculation that the property value will appreciate... thus risking none of your own money on the investment.

This is not intended as legal advice as I am not an attorney, but I am licensed with the Dept of Real Estate.

[pagan]

My thought as well, Scott.

[ScottA]

The part everyone is missing here is what if the home is not forclosed but simple re-financed at the new value. My guess is you will have to pay tax on the forgiven amount. I already knew about the exclusion for those who where forclosed on. The IRS is not as forgiving as the laws might lead you to belive.

[eddiescabin]

Bayview, the lender must ok the short sale...
ScottA- You are completely correct.

The thing that struck me is that one could make an investment solely on speculation and not have any risk! (if it was a purchase money loan)

[eddiescabin]

To expound a bit on why foreclosure may be a better option than shortsale  (in Ca) is that the Ca law allows only a "single action" against the borrower in a mortgage.  If a homeowner defaults on a loan secured by a mortgage/deed of trust, the lender can only take a "single action", as in, the lender can foreclose.   After the lender forecloses that is the only action allowed (ie, they cannot file suit against the borrower for anything left unpaid on the loan).  In some states, the lender can then go after the borrower for any unpaid balance after foreclosure. Thus, in CA, a forecloseure is generally the best way for a lender to recover a default.  If, however, the borrower sell in a "shortsale", which is agreed upon by lender and seller, the mortgage is gone....but that leaves the borrower unprotected against a suit filed by the lender to get any unpaid loan balance.  Thus, a forecloseure is far better for a borrower that owns an "underwater"  (worth less than the loan)property.  his is paraphrased from another source...