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You are here: Home » 2012 » March

BofA PRINCIPAL REDUCTIONS

The ink is hardly dry on the $25 Billion foreclosure settlement deal and Bank of America is already releasing some preliminary info on how they intend to comply. Last week they announced that they are going to reduce principal balances on as many as 200,000 homeowner’s loans. The number they are throwing around is an average reduction of $100,000.
For some homeowners, this could wipe out the entire amount that they are underwater. For others it could be just a drop in the bucket. It’s not clear yet if everyone will get the same dollar amount of principal reduction or if there will be a formula.
To be eligible the loan must be serviced by Bank of America, and either owned by Bank of America or private investors. This includes those loans that started at Countrywide. Loans owned or insured by Fannie Mae, Freddie Mac, the Federal Housing Administration or the Veteran’s Administration are not eligible. The loan must also have been at least 60 days behind as of January 31.
Bank of America will begin contacting homeowners that qualify starting in April. They have three years to do the principal reductions to comply with the foreclosure settlement, but there are incentives for them to complete them quickly. If you have a Bank of America loan, you can call 877-488-7814 to see if you are eligible and for more information. If you find out that you are qualified, please let me know and we’ll rejoice together!

MORTGAGE FORGIVENESS ACT

The Mortgage Forgiveness Debt Relief Act of 2007 is about to expire at the end of this year. Mortgage forgiveness can occur in a short sale, foreclosure, or even a loan mod if they reduce your principal. Most people think that they have to “hurry up” and make sure their short sale, loan mod or foreclosure occurs by December 31 of this year to qualify to make sure they don’t have to pay tax on the 1099 they’ll receive for any forgiven debt.

The good news is that there is talk in Washington D.C. right now about extending the Mortgage Forgiveness Act through the end of 2014. It’s included in President Obama’s recent budget proposal, so this is pretty seriously being considered. The bad news is that the Act doesn’t do what everyone seems to think it does. It is not a blanket exclusion where any forgiven debt is tax-free. As I read the IRS tax regulations, even when the Act is in place, it still doesn’t cover money you took out of the home and spent somewhere else. What it does cover is money used to buy, build or substantially improve a principal residence (which means this is NOT for investors). As I understand it, the Act was closing a loophole where some people had refinanced their loans, taken NO cash out, but were going to be taxed on the forgiven debt just because they had refinanced their loan, which didn’t seem fair.

Even if the Act expires, there are still other exemptions in the tax rules that will cover many people, specifically insolvency (when your debts exceed your assets) and if your loan was used to buy, build or improve your residence. For most of my clients who are facing a short sale or foreclosure, they appear to qualify for one of these exclusions.

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