New Federal Mortgage Relief Program for Massachusetts Consumers: Impacts on Bankruptcy

The Federal Housing Administration announced a new series of steps aimed to assist troubled homeowners. Our Massachusetts bankruptcy clients are likely to ask how qualifying for this program will effect their potential personal bankruptcy cases. The short answer is, for most people, this should not have any adverse impact. This is because the bankruptcy code allows consumers to “exempt” home equity up to $125,000, and the new program deals with homeowners who are underwater in equity; they owe more than the house is valued in today’s real estate market. Thus, now may be an excellent time to take advantage of this new federal program, regardless of filing for bankruptcy protection for your other consumer debts.

If you owe more than 115% of the value of your first mortgage, and your current mortgage payment is more than 31% of your family gross income, you may qualify. The program also deals with second mortgages, people who are unemployed and houses with negative equity. There are approximately 7,000,000 households that are behind on their mortgages. There are an additional 11,000,000 households where the mortgage owed is higher than the value of the house. The focus of the program is to help homeowners rewrite their mortgages with their lenders. The program also assists folks who are foreclosed upon to move, providing $3,000 in “relocation assistance.”

And, the ultimate question our clients ask: how will this impact my credit history? Like usual, it is not completely clear. If your mortgage holder writes off some of the principal, it is not clear if this will adversely affect you. Folks taking advantage of the current loan assistance program have not had their credit scores reduced. This because the US Treasury and the Consumer Data Industry Association (the credit reporting agencies) have made a “deal” in which these transitions are not included in credit scores.