Attorney General Kamala Harris has announced a new piece of legislation called the Homeowner Bill of Rights, effective January 1, 2013, that will protect homeowners and borrowers during the mortgage and foreclosure process. This law makes banks a lot more transparent, and allows homeowners to access courts to enforce their rights.
Under this law, a homeowner is entitled to request evidence that the foreclosing party is the rightful party to foreclose on the property in question. The homeowner can also request records from the bank documenting the property’s past mortgage payments. As of January 1, 2013, if a bank postpones a trustee sale for over ten days, then the homeowner must be notified in writing. Additionally, this legislation requires a single point of contact at the bank where homeowners can have all of their questions addressed without the frustration of being transferred to multiple departments.
The California Homeowner Bill of Rights will allow homeowners to find out exactly what is going on with their loans and if they are being foreclosed on. Currently, if a homeowner is going through a loan modification but is also in default, the foreclosure process and the loan modification process progress simultaneously. As of January 1, 2013, the foreclosure process will stop as soon as the homeowner starts a loan modification. However, the Homeowner Bill of Rights will not change anything for homeowners that applied for a loan modification before January 1, 2013, unless there has been a material change in income.
These changes are the result of a $25 billion settlement with the Big Five banks: Bank of America, Citibank, Chase, Wells Fargo, and GMAC (Ally Financial). For the next three years, from December 3, 2012 to December 3, 2015, the banks are required to distribute the settlement funds, up to $18 billion of which was secured by Attorney General Harris for California homeowners.
Principal Reductions and Refis
As of October 3, 2012, Bank of America has set aside $8 billion for principal reductions. This means that for some homeowners that are underwater, Bank of America can reduce the amount they owe on their home mortgage. For example, one homeowner owed $350,000 on a first mortgage and $200,000 on a second. Bank of America reduced the homeowner’s principal by $200,000, wiping out the second mortgage.
Because the banks will receive a credit as an incentive for offering principal reductions, I think they will work directly with homeowners and as a result, there will be very few or no residential foreclosures in California over the next five years. Many homeowners will be receiving favorable letters from their bank, essentially allowing them to stay in their homes. The big takeaway for underwater homeowners: Make sure to open your mail.
There is also $3 billion set aside for short refis to aid homeowners that have tried to refinance in the past, but were unable to do so because their property was no longer worth what they paid for it.
Short Sale Options
After December 31, 2012, we don’t know if the current short sale relief law will be extended into 2013. Whether the law gets extended or not, there are two options available to short sellers. I have an attorney that I can refer my clients to, who will look at your situation and discuss your options with you. One option is called insolvency, or what he refers to as the “Kodak moment”. The attorney, in essence, takes a picture of your financial situation when you do a short sale and when you are going to file bankruptcy. If, at that time, you have more liabilities than assets, then you would be considered insolvent and not have to pay taxes if the short sale occurred after January 1, 2013.
The second option is to protect your retirement fund during bankruptcy. Your 401(k) or IRA can be the one asset that you protect, while still being able to short sell your house and not pay taxes.
If you are underwater with your home loan and/or in default, call your bank, talk to them and see what programs you qualify for. You can also call me at (626) 253-4557. I’d love to sit down with you or refer you to a great attorney who can discuss your options with you.