Distressed home loan borrowers are set to receive some level of financial relief as the national mortgage settlement filed in February in federal court demanded $ 25 billion in compensation from the top five big and bad mortgage service banks; Bank of America, Ally Financial, JP Morgan Chase, Wells Fargo and Citibank. Each are required to forgive at least $10 billion worth in principal payments of homeowners’ mortgages. The allocation and distribution of relief funds is complex as each servicer has different requirements based on the mandate from the federal government. Bank of America borrowers may see their principal loan payment cut to the point where they will no longer owe more than the value of their home. In stark contrast, other servicers are required to write down mortgages where a borrower’s new loan is only 20 percent more than the home value. The disparity between these two options stems from a separate agreement between Bank of America and federal officials where the bank will avoid over $800 million in penalties in exchange for instituting deeper cuts in loan principal payments.

Underwater borrowers whose mortgage is owned by Fannie Mae or Freddie Mac are not entitled to loan modifications under this settlement.  With half of the loans in this country owned by these two institutions it is crucial that these federal entities devise a systematic approach in order to provide financial relief to their borrowers.

Housing statistics since the beginning of 2012 show an uptick in demand, and foreclosure inventory and delinquency rates have dropped as reported by Core Logic, a leading analysis firm. Momentum to rise out of the depths of the housing crisis is building and providing substantial loan modifications will provide aid in resuscitating the housing industry. But what about the other 50%?  The 50% of the borrowers whose loans are owned by Fannie and Freddie? For now these borrowers have finite options.  We speculate that a sweeping measure will not be likely to take shape as the Obama administration needs to put forth a proposal that both Congress and Fannie and Freddie Mac will endorse. Until now both entities have been reluctant in their support of President Obama’s proposal which was unveiled on February 21st. As the presidential campaign heats up the “other 50 %” may likely remain out in the cold without loan modification assistance.

The silver lining for borrowers that were lucky enough to have purchased a home via Bank of America and the other five servicers may finally witness cosmic karma in action, yet with  any bureaucratic mandate it may be several months before all home owners will feel the results of this extraordinary settlement.  Better late than never…that depends on who you ask.


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