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Federal mortgage modification programs designed to expire when the economy stablizes in 2015.

The government is betting the economy will rebound and stabilize in 2015. I want one of those crystal balls.

con artist

No – not again!!  You thought the foreclosures were behind us.  Right?  It turns out that many of the government programs intended to modify home loans have only delayed the inevitable because some of the programs as set to expire in 2015.   One of these programs, Home Affordable Modification Program (HAMP) was designed to provide homeowners with temporary interest rate relief.  That relief expires after five years at which time the interest begins to creep up.  When the program was designed the assumption was our economy would be back to “normal” by 2015.  Oops!!

TransUnion, the credit rating firm, estimates that between $50 and $79 billion in home-equity lines of credit may default because of the increased payments.

Couple the expiration of the government programs with fact that many home equity lines of credit are scheduled to increase interest payments to the next level in 2015.   TransUnion, the credit rating firm, estimates that between $50 and $79 billion in home-equity lines of credit may default because of the increased payments.

According to the research firm Black Knight they estimate that two million modified mortgages will face interest rate resets in the next couple of years.  Their research also shows that nearly 40 percent of those homes are worth less than the total debt owed.  The term used to described these homes is “underwater”.  Typically underwater homes have a much higher rate of default and foreclosure than those with equity (a house that is worth more than the secured debt).   Owners of underwater homes will face another round of “what do I do now” nightmares.

Is that all they have to throw at you?  No!!  Due to the expiration of the Mortgage Forgiveness Debt Relief Act much of the mortgage relief (called “forgiveness of debt”) offered to borrowers will be treated as earned income for tax purposes.  This forgiveness of debt is usually taxed as ordinary income.  (Please note this is not intended to be tax advice, I am not a tax expert.  Talk to someone who is).  The first tax bills will come due in April 2015.  The most recent settlement, with Bank of America, includes a dedicated fund of $490 million to defray the tax obligations that arise from the modification of these home loans, but even Justice Department spokesmen acknowledge that the fund won’t defray all the costs.

Tax obligations and legal exposure is why I have been counseling many of my clients to let their property go to foreclosure.  In Arizona there is protection for the borrower with certain types of property.  See my flow chart on Arizona Anti-deficiency statutes.

I cannot count the number of times I told my clients and my students that they need to make informed business decisions before entering into any loan workout programs.  I understand the “I want to keep my house” war cry, but there must be a business analysis of whether or not the house is a wise economic investment.  Sometimes the answer to that question is “yes”.  Great – modify away, take money from your retirement, borrow money from family and sell everything you own.  But, most of the time the answer is “no”.  In that case move on.  A house is only a house.  You did not own the house before you bought it and you will own another house later.   Right now what is more important is your health and your families happiness.

We have several videos on this site.  This is one “Should I keep my home or Let it go to foreclosure?”