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This page is no longer maintained. Modification programs turned out to have a limited effect, and it is impossible to quantify the impact of refinancing programs. It will be sufficient just to watch progress on the backlog of distressed loans.

US foreclosure mitigation efforts

Summary

8 Mar 2011.

Since the housing crisis began in 2007 there have been a number of ambitious modification programs meant to help with the wave of foreclosures. There has been some positive effect, but the number of modifications has remained small compared the millions of distressed loans, and a large fraction of modifications re-default. Further, refinancing does not address the chief cause of default, which is negative equity. So in a large fraction of cases the mitigation efforts serve only to delay the inevitable.

With 5 million distressed properties, and limited success with foreclosure mitigation, home forfeitures are likely to remain elevated for a long time.

Highlights

(Clippings below covered through 24 Feb 2009)

Large scale mortgage modification (8 Mar 2011) Since the housing crisis began in 2007 there have been a number of ambitious modification programs meant to help with the wave of foreclosures. There has been some positive effect, but the number of modifications has remained small compared the millions of distressed loans. Further, a large fraction of modifications re-default, and in those cases modification serves only to delay the inevitable.

All told, home forfeitures are likely to remain elevated for several years.



Large scale mortgage refinancing (8 Mar 2011) The drop in home values has derailed many homeowners' plans to refinance out of expensive mortgages. The government has introduced a number of special refinancing programs aimed specifically at unaffordable (including underwater) mortgages. FHASecure and Hope_for_Homeowners saw almost no uptake. The latest special program, HARP, allows refinancing for Fannie Mae and Freddie Mac loans with significant negative_equity. Fannie and Freddie refinanced 6.8 million loans between Apr 2009 and Dec 2010, of which 621,800 were done under HARP.

By reducing payments on large numbers of mortgages, this refinancing no doubt has had a positive effect on delinquencies and defaults. However, since negative equity is the most important predictor of default, and refinancing does not change a negative equity situation, it remains unclear just how strong any positive effect may be.


Multiple lender issues in foreclosure mitigation (8 Mar 2011) Over half of all first liens have associated second liens, and a key difficulty for mortgage modifications lies in the different interests of first and second lienholders. First lienholders typically feel that, per their senior status, they should not have to give up significant value in refinancing or modification until after second lienholders are wiped out. On the other hand, modification of the first lien puts its senior position in a position of legal ambiguity, and second lienholders use this to extract some value. The 2MP component of the Making Home Affordable program was designed to break the deadlock by requiring participating servicers to modify second liens in a parallel manner with first, or accept an extinguishment payment. However 2MP has seen essentially no uptake.

Although securitization does make a mortgage modification decision more complex – if only because there are more interested parties – it is unlikely that securitization is a primary roadblock. However securitization can stand in the way of principal reduction. This can be a contract issue or a conflict of interest between holders of different tranches. Whatever the cause, principal reductions do occur less often with securitized loans.


Tax relief (8 Mar 2011) Under the Mortgage Forgiveness Debt Relief Act of 2007, mortgage debt forgiven in a workout, in years 2007-2012 is not, in most cases, taxable.


See also

Below are the clippings used in constructing this page

Mortgage forgiveness tax relief

24 Feb 2009. IRS website.

http://www.irs.gov/irs/article/0,,id=179073,00.html

“Mortgage Workouts, Now Tax-Free for Many Homeowners”

“Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. … Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. … The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details. …

Legislation enacted in October 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven in calendar years 2007 through 2012.”