Consumer Finance & Bankruptcy

A Little Help with Federal Student Loans

kgcully — Mon, 22 Jun 2009 22:43:25 +0000

If your income is low and you have direct or guaranteed Federal student loans (including Stafford, PLUS or Consolidated loans), you may be eligible for reduced payments under the Income-Based Repayment program that goes into effect on July 1. The IBR program reduces your payment to 15% of your income in excess of 150% of the poverty level (currently $16,245 for a single person and $21,855 for a married couple). For example: If you’re single and earn $20,000, the payments on your student loans will be capped at 10% of $3,755 (your $20,000 income less 150% of poverty, or $16245) — $375.50. There are three catches that make it hard to realize any significant benefits from the IBR program:

· Your parents aren’t eligible for the program

· If you’re married, your spouse’s income must be included

And of course

· 150% of poverty isn’t very much money, especially in New York

But if you qualify, it may be very helpful in dealing with your student loans, which are virtually impossible to discharge in bankruptcy.

Also, if you have a direct student loan – guaranteed loans aren’t eligible – and you have a public service job, you may be eligible for loan forgiveness beginning ten years after October 1, 2007. Since student loans are normally repaid in ten years, this Public Service Loan Forgiveness program will not affect you unless your payments were reduced or deferred (including under the IBR program). To qualify, you must have ten years of full-time employment with a nonprofit, government, Americorps or Peace Corps or in a position that meets the Department of Education’s definition of “public service.”

Further information is available through IBR Info at http://www.ibrinfo.org/what.vp.html.

Credit Card Issuers Settle Accounts for Lower Balances – NYTimes.com

kgcully — Tue, 16 Jun 2009 19:32:50 +0000

According to an article in today’s New York Times, credit card issuers are beginning to agree to writing down credit card debt, at least for borrowers who’ve been delinquent for more than six months. (The banks are required to completely write off debt that’s over 180 days delinquent, which turns any payment they can get from you into a form of profit.)

If you’re delinquent on your credit cards and you’ve previously received a brush-off from your card issuer, it may be worthwhile to call them again. All they can do is say “No,” and they might say “Yes.”

Just remember that the IRS may tax you on a write-down; they call it “cancellation-of-indebtedness income.” Filing bankruptcy makes you exempt from this tax, and you’re also exempt if you’re insolvent after the write-down. But if the write-down makes you solvent, it’s probably taxable. Call it Catch-22A.

Protection for Tenants in Foreclosed Properties

kgcully — Thu, 28 May 2009 00:27:36 +0000

It’s been common for residential tenants with valid leases who’ve paid all their rent on time to be evicted if their building is foreclosed on, sometimes with very short notice. The foreclosing lender wants to empty the building to make it easier to sell, but the practice can involve hardship and distress for the evicted tenants – who aren’t in default.

The Protecting Tenants at Foreclosure Act, signed by the President and effective on May 20, protects residential tenants by requiring the new owner to permit them to live in the property until their leases expire (as would have been the case if the building had been sold instead of foreclosed on). If a tenant has no lease or has a lease that can be terminated at will, or if the property is sold to a purchaser who will occupy it as his or her primary residence, the tenant must be given 90 days’ notice of eviction. So in most cases the tenant’s lease will be honored, and at a minimum the tenant will have 90 days to find and move to a new home.

New and Improved HOPE for Homeowners

kgcully — Wed, 27 May 2009 19:57:09 +0000

The HOPE for Homeowners (H4H) program provides refinancing for qualifying homeowners into new, government-guaranteed FHA mortgages with fixed rates and terms of 30-40 years, but has been little used due to onerous restrictions. The Helping Families Save Their Homes Act of 2009, which was signed May 20 and became effective that day, modified H4H in the hope of making it more workable for homeowners and lenders alike.

A lender who chooses to participate must write down the mortgage to a maximum of 96.5% of the home’s current (not original) value. In exchange, the homeowner must agree to share up to 50% of the new equity and any future appreciation with HUD, which can give the lender all or part of its share of the profits. But profits are capped at the home’s original appraised value, so the “profit-sharing” provision really only reduces the lender’s losses rather than giving it any profit opportunity.

Suppose, for example, a home was originally appraised for $500,000 with a first mortgage of $450,000; it’s now worth 20% less, or $400,000. Under H4H, the lender could write the debt down to $386,000 (96.5% of $400,000), the homeowner could refinance into a $386,000 FHA mortgage and pay the original lender, HUD could receive 50% of future profits and transfer those to the lender as compensation for its $64,000 loss (the original $450,000 less the $386,000 that was refinanced). Suppose that the home appreciates back to $500,000 and is sold immediately, for a profit of $100,000, of which the homeowner’s share is $50,000. The lender also receives $50,000 – but since its original loss was $64,000, it still has a loss of $14,000, even though the homeowner has an after-tax profit of $50,000. The profit-sharing cap means that the lender can never be made whole in this example, which assumed the best possible terms for the lender given an original loan of 90% of appraised value. (The lender could only have made a profit in the unlikely event the original loan had been less than 87.2% of appraised value.) And the lender has to wait for its share of the profits until the homeowner chooses to sell.

But the real reason for a lender to participate is that foreclosure would result in an even greater loss. In this market, though, that’s almost certainly the case (losses after foreclosure can easily exceed 40% of the mortgage balance). Rational lenders should prefer the lesser evil of H4H to the greater evil of foreclosure. For this reason, industry groups such as the American Securitization Forum and the Mortgage Investors Coalition have welcomed the H4H modifications.

Holders of second mortgages can also participate in the program but have been reluctant to do so, since their recovery would be limited to a small share of the lender’s share of HUD’s share of the profit-sharing. If they simply refuse to consent to the refinancing, they receive the full benefit of any future appreciation that exceeds the first mortgage – which could result in a full recovery on the loan and, if the home appreciated at all, would be likely to be more than they’d receive under the profit-sharing cap. And second-mortgage lenders can receive incentives under another government program, Making Home Affordable, further reducing their willingness to participate in H4H. But it’s likely that HUD will apply the same guidelines to H4H in order to encourage their participation, since without second-mortgage lenders H4H could only have limited success.

Homeowners must satisfy a number of conditions to qualify for H4H. Also, FHA mortgages are capped at $729,750 for a one-family home in the New York area. If you qualify, the new H4H provisions may give you another alternative to a short sale or foreclosure.

Short Sales May Become Practical

kgcully — Mon, 18 May 2009 03:08:38 +0000

It’s been very difficult to get banks to agree to short sales (in which a home sells for less than the balance on the mortgage). This leaves a homeowner who has financial problems only three options: pay the mortgage as written; try to obtain a deferral or reduction in interest amount, perhaps using the Administration’s Making Home Affordable (MHA) program; or await foreclosure and file for bankruptcy to discharge the deficiency (the excess of the mortgage over the value of the home). The first two options generally don’t work for a distressed homeowner, who can’t pay the mortgage as it stands or even with an interest reduction. A principal reduction might have reduced payments to an affordable level, but principal reductions aren’t covered by the MHA program and the Senate recently refused to allow principal reductions (“cramming down” the mortgage principal to the home’s value) even in bankruptcy. If short sales aren’t available, that forces the homeowner into the third alternative: foreclosure and bankruptcy – which resulted in a larger loss for the lender than either a short sale or cramdown, a lose/lose scenario.

Now the New York Times reports that at least some lenders may be working out protocols for short sales – a win/win scenario under which the lender’s loss is minimized and the homeowner is able to sell his house and move on without being forced into bankruptcy. One major reason short sales have been hard to achieve is that there’s often a second mortgage on the same property, the junior lender isn’t willing to release its lien unless it shares in the sales proceeds and the senior and junior lender can’t agree on the division of the sales proceeds. But the Times reports that some lenders, such as the Bank of America, have now standardized a 90/10 or 95/5 allocation between the two lenders, allowing short sales to move forward.

Perhaps the Treasury, which has stated that it will encourage short sales, had such an arrangement in mind. In any case, achieving a conventional allocation between junior and senior mortgage lenders would have a stabilizing effect on the residential housing market as well as helping both individual homeowners and individual lenders.

It’s not a cure-all, of course. Many mortgages have primary mortgage insurance, in which an insurer protects the lender against the first 20% of loss and must consent to any short sale; those insurers would also have to consent to the new allocation. Also, a homeowner who participates in a short sale but doesn’t file for bankruptcy may, depending on the circumstances, have taxable income equal to the deficiency amount (or his or her newly positive net worth resulting from the short sale). But short sales would be a big help.

Kathleen Cully