The often repeated Bible passage from Job 1:21 of the King James version is particularly applicable to the situation that is now facing distressed homeowners, severely underwater with mortgage balances far exceeding the property’s value and trying to get relief. After 4 years of dealing with the freefall in the value of people’s homes, at first it would appear as if we have finally gotten to the point where the various actions of governmental agencies and the mortgage industry are beginning to come together and generate a climate where relief for these underwater homeowners may be readily at hand.
First, we had the Obama Plan Tier I (HAMP), a realization by the various mortgage companies and servicers that they are better off modifying loans to keep people in their homes and making payments. Then there was the $25 billion massive Attorney General’s settlement ironed out between the individual State’s Attorney General and the big mortgage servicers, which supposedly made $10 billion available to go to assisting homeowners with principal reductions in their loan modifications. The way ahead seemed to be rational loan modifications with significant principal reductions to make those who are suffering from the economic downturn able to keep their homes and make their mortgage payments. Finally, there was the recent (June 1, 2012) HAMP Tier II Program which radically increased actual cash incentives for lenders to give principal reductions.
But, just like the game of chicken that the two political parties played with their refusal to increase the national debt ceiling until the very last moment, threatening default, and singlehandedly causing a reduction in America’s credit rating; on a smaller scale, the political deadlock between the donkeys and elephants now threatens to derail the progress of homeowners seeking rational loan modifications.
Specifically, in 2007, the Congress passed The Mortgage Forgiveness Debt Relief Act, which simply stated, authorizes an individual taxpayer to ignore the tax consequences of debt forgiveness when there is a principal reduction in their home mortgage. Normally, under our tax code, if a lawful debt is forgiven, such as in the case where the principal balance on an outstanding mortgage is reduced, the reduction constitutes income within the year that the debt is forgiven. Under the Act, as long as the amount forgiven is on a mortgage on their principal residence, there is no tax consequence. (The mortgage cannot exceed $2 million or $1 million for a married person filing a separate return.) This provision of the Internal Revenue Code is due to expire December 31, 2012. It was anticipated that the extension of this benefit would be readily approved, however, the handicappers are no longer sanguine regarding its extension. (This means that the experts are not sure that Congress can get itself together to agree on this provision which has universal support among 99% of the population.) Thus, there is a very real prospect that, once again, democracy in action will shoot itself in the foot.
Don't get me wrong, I like democracy. In fact, I like it better than any other system of government (other than that system which allows me to make all the decisions). Be that as it may, if you can read, or if you can understand what is broadcast over and over again within the last 4 years on what we euphemistically call the news, and you have not been living underground, one must realize that the likelihood of our national legislature agreeing upon anything, no matter how popular, is these days, certainly less than 50%.
All this means is: now is the time to pursue a loan modification. The banks are inclined; they have supposedly $10 billion to utilize under the Attorney General’s Settlement for a reduction of principal balances. Mortgage interest rates are at an all time low. Real estate values are scraping the bottom. The banks have been further incentivized by the Obama HAMP Tier II Program to propose principal reductions and to tax free consequences of any debt forgiveness would still be effective, at least until the end of the year. The process is not smooth, and it's often lengthy. The lesson to be learned here is that anyone thinking about trying to get a loan modification should stop thinking and start doing. Go to your mortgage servicer’s website, download the materials, hire a lawyer if you like, or proceed on your own. But whatever you do, if you think you are qualified for a principal reduction on your mortgage due to significant reduced value and financial hardship, you would be a fool not to try.
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