I have a 5 year ARM 80/20 through Amtrust Bank. The 20 is a HELOC. I was recently contacted by Quicken loans who is offering to buy both of my loans from Amtrust and roll them into a 30-year fixed. I called Amtrust and they said it was legit. The deal sounds too good to be true though: Amtrust is agreeing to write off about $14,000 which means that after the closing costs, insurance premium (I didn't have mortgage insurance with my current loan) and other costs means that in the end my total owed will drop by about $5,000. It won;t actually lower my monthly payment much, but will turn my ARM into a 30-year fixed, and will reduce my principal by $5,000 so it looks tempting. But is it too good to be true for Amtrust to really write off this money? The guy I talked to said it would just show up as a refinance and so would not hurt my credit or be reported as a partial payment.

Has anyone heard of this? Any ideas for how I can be sure Amtrust won't report this in some way to mess up my credit?

I appreciate any ideas folks have. Thanks.

These deals are legit.

AmTrust is doing this to get these loans off its books. AmTrust does not want exposure to an 80% ARM and a 20% HELOC behind it. They are essentially locking in a reasonable loss (in the principal writedown) so that these weak loans can't go bad and cost them more, and don't weigh on the loan loss reserves they must set aside to cover risky loans (of which yours are).

This strategy works because Quicken can then write the new loan as FHA-insured, thus removing all risk from everyone's portfolio. AmTrust would no longer be carrying the risk of those loans on its books. Quicken also has no exposure, because FHA will be insuring the loan.

It is a free lunch for you.

I've done quite a few loans like this for borrowers. You are lucky to have a current mortgage holder who wants their loans gone and is willing to take a small hit for it. Since the current mortgage holder is motivated, you should try to negotiate down the fees or negotiate up the principal reduction.

Remember, these loans are very profitable for the company doing them, because the borrower isn't paying a dime in order to get a better loan than they currently have. For this reason, most borrowers will just sign on the dotted line, and let the new lender reap enormous fees. This presents an excellent opportunity to you to negotiate with them on their fees, as well as with AmTrust on their principal reduction. If you play your cards right, you could come out of this with a better loan and a five figure sum of principal reduction.

This will not hurt your credit as long as AmTrust reports the loans as being fully satisfied. You should protect yourself by asking them for a promise, in writing, that they will report the loans as fully satisfied, as it is they who offered to give you an equity gift in order to refinance. There is a credit reporting code which hurts your credit, and is described as debt settled for less than the full amount. This code should only be applied when the lender agrees to a borrower's hardship as part of a loss mitigation strategy. This is not true in your case, so AmTrust should report this as satisfied in full, since they proposed giving you equity as an inducement to refinance. The letter substantiates your case should a mistake in the credit reporting department ever make it to the bureaus.

You just hit the homeowner lottery. You get free money from somebody else's loss mitigation strategy, without being a deadbeat yourself, and trashing your credit in the process.

How does the fixed rate percentage compare with your existing 5 year ARMs?

MidwestGuy said:Thanks all. The interest rate is almost the same as my current rate. I talked to Amtrust and they said it will be reported as a fully satisfied loan, but that I will get a 1099 for the amount they write off... still a good deal for me it seems.
Is the 1099 for the entire 14k? If so, and assuming a 35% marginal tax rate, you will end up with ~5k in taxes which is about what you net in terms if principal reduction. Can any part of the 9k in "fees" be deducted on your tax return?

ETA: Ignore this and see the two posts below.

jcole21 said:It won't be taxable. Google '1099c'.
Thanks for setting that straight. BTW, here is the info. from the IRS.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

The amount excluded reduces the taxpayer’s cost basis in the home.

Maybe I'm wrong, but looking at the info from a Google search, I think I will have to pay taxes on the 1099c.

At least that's my read from this link: http://www.carreonandassociates.com/articles/bewareirs.htm. I'm not foreclosing and I don;t think this will qualify as non-recourse debt. From my read, it looks like if they issue me a 1099c then I have to count it as income.

Am I way off?

Thanks for all of the help everybody - I definitely appreciate it.

MidwestGuy said:Maybe I'm wrong, but looking at the info from a Google search, I think I will have to pay taxes on the 1099c.

At least that's my read from this link: http://www.carreonandassociates.com/articles/bewareirs.htm. I'm not foreclosing and I don;t think this will qualify as non-recourse debt. From my read, it looks like if they issue me a 1099c then I have to count it as income.

Am I way off?

Thanks for all of the help everybody - I definitely appreciate it.I took a quick look at that article, but I didn't see a date, so maybe it was written before the Mortgage Forgiveness Act mentioned above. In any case, I think you'd be better off looking at the Instructions to Debtor on the Form 1099-C