Homeowners Re-Defaulting on Loan Modifications at an Alarming Rate

The Treasury Department and managers of the Home Affordable Modification Program (HAMP) are scrambling to figure out why homeowners who used the government’s bailout mechanism to save their homes are re-defaulting on their payments.

The program, originally designed to assist homeowners who were facing foreclosure following the 2007 sub-prime crisis, has reportedly saved 1.2 million people from losing their homes, but a report from the Special Inspector General who oversees the government’s Troubled Asset Relief Program (TARP) says that the loan modifications that were supposed to get American families back on their feet aren’t working as well as expected.

“We launched this program in response to the worst housing crisis since the great depression,” Treasury Assistant Secretary for Financial Stability Tim Massad said in a press call.

“There will always be an inherent risk of homeowner default in programs like this,” Massad added.

Approximately 10% of homeowners with an active HAMP permanent modification — a total of 88,000 out of 865,100— have missed one or two monthly mortgage payments and are at risk of redefaulting out of the program.

Redefault rates of the oldest 2009 HAMP permanent mortgage modifications have continued to increase as they age and have reached a 46% redefault rate. The 2010 HAMP permanent mortgage modifications are redefaulting at a rate of 38%.

The Treasury department is going to launch an investigation into why the program isn’t working.

Not only has the program fallen far short of that goal but with each year of the program, a growing number of homeowners have re-defaulted, the inspector general found.

“Treasury needs to research why so many borrowers are dropping out of the program,” said Christy Romero, the head of SIGTARP.

In 2009, as President Obama assured the nation that his multi-billion dollar economic bailouts would restore the economy and the housing market to stability and growth, we noted that you can modify these mortgages all you want, but that one important factor would be essential to their success.

But it is evident that re-.default is highly attributed to job loss.

According to the June 2013 jobs report, less than half of able-bodied Americans have a full time job.

The following report further illustrates the problem(s) we face.

Two food stamp recipients have been added for every job ‘created’ under President Obama’s watch:

Since February of 2009, the first full month of Obama’s presidency, 9.5 million Americans have dropped out of the labor force. Nearly 90 million Americans are not working today!

That means that 1.3 Americans have dropped out of the labor force for every one job the administration claims to have created.

There are 15 million more Americans on food stamps today than when Obama assumed office.
At the end of January 2009, 32,204,859 Americans received aid from the Supplemental Nutrition Assistance Program. As of April 2013, there were 47,548,694 Americans on food stamps.

That means that more than two Americans have been added to the food stamp rolls for every one job the administration says it has created.

Mortgage Forgiveness Debt Relief Act of 2007 May Not Be Renewed

As you remember from my previous posts, there is a federal law that forgives debt in a situation of a principal reduction or short sale.

Some background: Typically a short sale occurs when the property is no longer worth the amount that the lender is suing you in foreclosure for. (ie you are being sued for $300,000 and your home is only currently worth $150,000).  In this case, you wish to sell the property and think you can do so for around $150,000.  You, or your lawyer, will be asking the bank for forgiveness off the debt above the $150,000 in our example, thus releasing you from any money liability to your lender and “walking away clean.”

But there is an issue with this.  What happens to that forgiveness in terms of your taxes? Usually, forgiveness of any type of debt is considered income to you, and thus taxable.  In our example above, the homeowner would be liable for taxes on $150,000 in extra income. This means if you make a yearly salary of $50,000, next year you would be taxed on $200,000 in total income, and at a much higher tax bracket.

The Mortgage Forgiveness Debt Relief Act of 2007 was made to address this issue Act stated that in the case of debt forgiveness for a primary residence, this income would NOT be taxable.  thus, in our example above, the $150,000 would to be taxable and would vanish “into thin air.”

The same applies if you got a reduction of principal in your loan modification.  The amount of principal reduced would vanish and not be taxable.  If the Act is not extended, this would be additional income to you in that year and drive you into a much higher tax bracket.

There has been little to no mention of this Act to date, which is set to expire December 31, 2013.  In the wake of a near-collapse of the economy, the debt ceiling, government worker furloughs and other crises. I do not see this Act being renewed again.  There has been no talk in the news or coming out of the capital on this issue, despite the Act expiring in 58 days.

David Stern Disbarred

This week the Florida Bar decided to disbar David Stern years after he ceased business.

In a “ho-hum” decision, the Bar charged Stern $60,000 in fees/fines and disbarred him.  Barely a victory after Stern walked away with tens of millions of dollars.  I am pretty sure that he does not need to work another day of his life, nor needs that law license anymore.

It is an interesting read in that it describes the systematic fraud that Stern and his employees committed on the courts with falsified documents, affidavits and assignments.  Unfortunately, the courts have shown that they do not care as long as the documents are in hand the ban wins.  

It goes through to describe, as most know by now, the improperly notarized assignments and robo-signing by Cheryl Samons.  It describes Ms. Samons signing assignments without notaries and witnesses present only to be improperly notarized later.   Again, unfortunately judges simply do not care about this fact as it technically does not void this assignment or the intent to transfer per se.

While an interesting read, it really does little in terms of the state of foreclosures in Florida or the arguments to be made in court.