Five big banks have finally agreed to a mortgage settlement that is described as the largest federal-state civil settlement in history. The settlement is an effort by state and federal District Attorneys to penalize the robo-signing that occurred in the time leading up to the 2008 real estate crisis, and the foreclosure misconduct that followed as the financial market declined; as part of this settlement, JP Morgan Chase, CitiMortgage, Wells Fargo, Bank of America, and Ally Financial have agreed to allot $18 billion toward aiding California homeowners in reducing the amount they owe on underwater mortgages.
- Before we discuss what this means for you, you should familiarize yourself with the following qualifying criteria: The loan must be owned/serviced by one of the 5 Banks partied to the settlement: JP Morgan Chase (EMC Mortgage), CitiMortgage (Citibank), Wells Fargo (Wachovia), Bank of America (Countrywide), and Ally Financial (GMAC).
- Generally, homeowners must have either missed a mortgage payment or be at risk of doing so; Bank of America specifically requires that the homeowner have been behind by at least 60 days as of January 31, 2012.
3. The property must have a pre-modification Loan-To-Value ratio of at least 100%.
4. The home must be your primary residence. TIP: You do have the option to move into your investment property prior to submitting a modification request for the purpose of satisfying this requirement.
5. You must pass a Net Present Value test, which uses a goal of 31% as an acceptable debt-to-income ratio. Recall from our previous article that lenders use the NPV test to calculate the expected loss on a foreclosure and modify the loan terms only to the extent that the investor comes out ahead financially.
Should you meet the above criteria, your mortgage company will then look to modify your loan by first reducing your principal balance, and then reducing your interest rate to as low as 2%; previously, lenders were required to reduce your interest rate as the first step in a modification and were reluctant to even consider a principal balance reduction.
More good news is that 250,000 California homeowners are slated to benefit from the new principle balance reduction program, whereby lenders have committed $12 billion in write-downs. Additionally, lenders are required to give the borrower every conceivable benefit of the doubt before proceeding with foreclosure.
Once partaking in the relief process, homeowners will be assigned a SPOC (single point of contact) within their bank/loan servicer. The SPOC is responsible for (a) communicating loss mitigation options and account status specific to the borrower, coordinate the receipt of relevant documents, (b) remaining informed and knowledgeable about the borrower’s situation, and (c) considering the borrower for loss mitigation options. The SPOC will remain assigned to the borrower until the servicer determines in good faith that all loss mitigation options have been exhausted, or the borrower becomes current.
Though this program requires banks to provide relief to homeowners under these guidelines for the next 3 years, this program does operate on a first-come, first-served basis, and the settlement gives lenders incentive to provide the majority of their designated funds in relief to homeowners within the first year of this program alone.
Ultimately, the objective of this settlement is to relieve homeowners of the financial burdens caused by the 2008 economic crisis, and to penalize big banks for the procedural misconduct that took place during that time. Per the guidelines of the settlement, banks now have a financial incentive to provide mortgage assistance to borrowers, and the likelihood of your lender offering you a loan modification and reducing the principle balance on your mortgage has increased significantly.
We’re happy that mortgage lenders are finally being held accountable and that homeowners with negative equity have a practical solution to their financial burdens. Hopefully, homeowners will be proactive in taking advantage of this program while it’s still available.
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