Recent Changes to the Mortgage Process

Web Admin - Friday, January 24, 2014

By: Jay A. Andrew
(847) 934-6000

In the wake of the 2008 financial crisis, Congress created the Consumer Financial Protection Bureau (CFPB). The CFPB is an agency that Congress tasked with regulating companies in the financial sector, such as banks and hedge funds, to ensure that consumers do not find themselves treated unfairly by such institutions. To that end, the CFPB passed a qualified mortgage rule. This rule places certain restrictions on the types of loans that banks can authorize, but it also provides them some protection against consumer lawsuits.

In addition to creating the CFPB, Congress also responded to the financial crisis by passing The Mortgage Forgiveness Debt Relief Act (MFDRA). This Act had prevented people from being taxed on mortgage debt that banks forgave. However, the Act expired on December 31st, and Congress did not choose to extend it. This expiration impacts consumers dealing with foreclosures and short sales.

Qualified Mortgages

Qualified mortgages are a feature of the CFPB’s “ability-to-repay” rule, which requires lenders to verify a person’s income and other financial details to ensure that they can afford the mortgage they want. The CFPB put this regulation in place to stop banks from recklessly giving out mortgages without checking people’s financials. The rule also prohibits a variety of loan features that contributed to the 2008 crash, like interest only loans or terms lasting more than 30 years. If the bank complies with all of these requirements, they receive legal protection for the loan.

The law places different levels of protection depending on whether the loan was prime or subprime. Consumers will find it difficult to sue on prime loans if they meet the qualified mortgage requirements. But, if they have a subprime mortgage, they may still be able to show the court that the bank did not comply with the ability-to-repay requirements, which may help them in a lawsuit.

The Mortgage Forgiveness Debt Relief Act

Congress passed the MFDRA in order to help people struggling under mortgage debt during the financial crisis. The Act helped people who owed more money on their homes than the homes were worth by lowering their tax burden. Before the Act, if a bank forgave a person’s debt, the government would tax the person on the forgiven debt as if it were income. The Act put a stop to that for the purposes of some mortgage debt.

However, the Act expired at the end of 2013, and though some members of Congress of are still talking about renewing it, that has not happened, which means that the tax break no longer exists. Now, if a person has their mortgage debt forgiven as part of a foreclosure or short sale, they may end up owing taxes on the forgiven debt.

If you have questions about your mortgage, contact a Des Plaines real estate lawyer today. Call 847-934-6000 to reach out to our firm. We serve many northwest suburban areas including Arlington Heights, Deer Park, Barrington, Buffalo Grove, and other nearby communities.

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