Category Archives: Making Home Affordable Programs

Will the Mortgage Forgiveness Debt Relief Act Continue in 2014?

Cut Taxes shutterstock_120256129The Mortgage Forgiveness Debt Relief Act of 2007 expired on December 31, 2013. But because Congress is still considering a bill that would extend the Act through 2014, there’s no need to worry yet if you think you might have mortgage debt forgiven in 2014.

What Is the Mortgage Forgiveness Debt Relief Act?

If a creditor (such as your mortgage lender) forgives some or all of your debt, the IRS treats the forgiven debt as income. This means that you normally have to pay income taxes on forgiven debt. (There are some exceptions to the rule that you must pay taxes on forgiven debt.)

This could be bad news if you are a homeowner who recently had mortgage debt forgiven, perhaps after a foreclosure or short sale, or as part of a loan modification.  Luckily, about seven years ago Congress came to the rescue and passed the Mortgage Forgiveness Debt Relief Act of 2007.  Under the Act, homeowners with certain types of forgiven mortgage debt don’t have to pay income tax on the forgiven amount.  (Not all forgiven mortgage debt qualifies for this tax break. For details, see Nolo’s article Canceled Mortgage Debt: What Happens at Tax Time?)

The Act originally applied to mortgage debt forgiven between 2007 and 2009, but it has been extended several times. The most recent extension, however, expired on December 31, 2013.

Will the Act Be Extended Again?

A current bill in Congress, the Tax Extenders Act of 2013 (S. 1859), sponsored by Senator Harry Reid, would extend the Act through 2014. While not much seems to get done in Congress these days, some experts think that passage of the Mortgage Forgiveness Debt Relief Act likely.  We’ll keep tabs on the issue and report back on the bill’s progress.

9th Circuit Tells Wells Fargo: You Can’t Have Your Cake and Eat it Too

Processed by: Helicon Filter;In a recent case, the Ninth Circuit Court of Appeals told Wells Fargo that it had to live up to its part of the bargain when dealing with modifications under the federal HAMP program.

HAMP and the Trial Period Plan

In that case, Corvello v. Wells Fargo (and its companion case Lucia v. Wells Fargo), the homeowners applied for mortgage modifications under the federal Home Affordable Modification Program (more commonly known as HAMP).  Although lender participation in the HAMP program is voluntary (lenders get monetary incentives to join in), if a lender does choose to offer HAMP modifications, it must comply with program rules.  (To learn more about HAMP, see the articles in Nolo’s  Federal Making Home Affordable Programs topic page.)

In accordance with HAMP rules, Wells provided the homeowners with a trial period plan (TPP). Under the TPP, the homeowners were to submit required documentation so that Wells could determine HAMP eligibility. The homeowners also had to make trial payments to Wells. The TPP also lays out Well’s obligations.

  • If Wells determined that the homeowners did not qualify for modifications, Wells was required to notify them of this fact and immediately end the period of trial payments.
  • If Wells determined that the homeowners did qualify and the homeowners made all trial payments, Wells was required to offer the homeowners permanent mortgage modifications.

Mr. Corvello kept his end of the bargain – he submitted all required documentation and made the trial payments. Wells Fargo didn’t keep its end of the bargain. It accepted and kept all of Mr. Corvello’s trail payments, yet:

  • it never notified Mr. Corvello that he did not qualify for HAMP
  • nor did it offer him a permanent modification.

The facts in the Lucias’ case were similar, except that Wells actually foreclosed on their home.

The Ninth Circuit Says:  Wells Fargo Is Not King

When taken to court, Wells argued that it was not “contractually obligated” to offer Mr. Corvello or the Lucias a permanent loan modification.

The Ninth Circuit, in its majority opinion, was less than thrilled by Wells’ position which it characterized, more or less, as this:

“Hey homeowner, thanks for the trial payments and for living up to your end of the bargain. So sorry we never got back to you about your eligibility, but actually we don’t feel like offering you a permanent modification after all.”

The concurring judge (he agreed with the final result but for different reasons), was more blunt in his assessment of Wells Fargo’s business practices.  He pointed out that Wells Fargo drafted the TPP agreement itself and worded it in such a way as to engage in “flim-flam or, in plain words, to work a fraud.”

The bottom line: If the lender signs a TPP with the homeowner, the homeowner complies with the terms of the TPP, and the lender does not notify the homeowner of ineligibility, the lender is contractually obligated to provide the homeowner with a permanent modification under HAMP.

Will Mortgage Lenders Change Their Behavior?

The Ninth Circuit pointed out that the Seventh Circuit and some other courts have come to the same conclusion – that if a lender chooses to participate in HAMP and the homeowner complies with all terms of the TPP, the lender must offer a permanent mortgage modification if it does not inform the homeowner of ineligibility. Hopefully, lenders will start to get the picture – they cannot always have their cake and eat it too.  Although if history teaches us anything, it will take even more litigation to drive the point home.

Making Home Affordable Programs Extended Through 2015

This morning Treasury Secretary Jack Lew announced that the deadline to apply for federal Making Home Affordable (MHA)  programs designed to assist struggling homeowners will be extended another two years, to December 31, 2015.

MHA Program Extensions

The extension will apply to all of the MHA programs. Some of those include:

  • Home Affordable Modification Program (HAMP)
  • Second Lien Modification Program (2MP)
  • Home Affordable Refinance Program (HARP 2)
  • Principal Reduction Alternative (PRA)
  • Home Affordable Unemployment Program (UP)
  • Home Affordable Foreclosure Alternatives Program (HAFA)

(To learn about these programs, visit Nolo’s Government Foreclosure Prevention Programs topic area.)

The department was emphatic, however, that these extensions should not lull homeowners into waiting to apply for relief. The government urged eligible homeowners to apply for these programs right away.

Extension of Tax Relief for Forgiven Mortgage Debt Is Top Legislative Priority

Mark McArdle, Chief of Treasury’s Homeownership Preservation Office also made clear that a top legislative priority this year will be to extend the Mortgage Forgiveness Debt Relief Act to December 31, 2015, so that it matches the MFA program deadlines.

The Mortgage Forgiveness Debt Relief Act allows  homeowners who have had mortgage debt forgiven or canceled (perhaps through a mortgage modification or restructure) or who have suffered through a foreclosure to have income tax on that debt forgiven.  The Act currently currently sunsets (ends) on December 31, 2013. (To learn more, see Canceled Mortgage Debt: What Happens at Tax Time?)