New Developments in Short Sale and Foreclosure

There were a couple of new developments this past month in the banking industry with regard to foreclosures and short sales. The 2 largest banks have made some movement in changing their policies.

First, the Bank of America announced this past month that it will introduce “principal forgiveness.” This term refers to reducing the loan balances of some distressed homeowners who have either adjustable rate mortgages or sub-prime loans. If a borrower “qualifies” for this reduction, it will not only reduce his principal (the loan amount) but also his monthly payments.

The Obama administration’s Home Affordable Modification Program, or HAMP, has a goal of lowering the payment on a first mortgage to about 31% of a borrower’s gross income.

Not sure how this is going to work, or how it will be received by the people who are not currently “distressed,” but it remains to be seen whether or not the Bank of America actually carries through with this promise.

Another problem that has held homeowner’s hostage over the past 2-4 years is the second mortgage. It seems that even though some people qualified for relief for their principal mortgage under the U.S. Treasury’s mortgage-modification program, their home equity or second mortgages were still putting them at risk for default (some consumers’ second loan payments are higher than their first’s). Wells Fargo and the Bank of America have bowed to pressure from the federal government to modify these home-equity loans.

As for its part, government has come to the aid of distressed homeowners in that the IRS has been told not to pursue taxing the forgiveness (the difference between what a short sale/foreclosure/loan modification nets the bank and what the borrower owes), on principal residences. For a while it looked like this would NOT be the case in the state of California but another bill passed very recently by the state legislature (SB 401) and expected to be signed by Governor Swartzenegger in time for April 15, 2010, would, make homeowners immune from state taxation on this “forgiveness” also.

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