How to Report National Mortgage Settlement Payments

April 8, 2014 | Kristy S. Maitre

Millions of consumers began receiving national mortgage settlement payments last year. The tax treatment of those payments depends on the taxpayer’s circumstances, but a letter accompanying the payment (summarized below) should provide some guidance.  

As a result of an Independent Foreclosure Review, federal regulators determined that 14 banking organizations employed deficient practices in residential mortgage loan servicing and foreclosure processing during the 2009-2010 mortgage foreclosure crisis. The banks and regulators subsequently reached an agreement under which the banks agreed to provide $3.6 billion in cash payments to borrowers whose home were in any stage of foreclosure during the crisis period.

The settlement, which impacts millions of consumers, includes consumers whose home loans were serviced by one of the following companies, their affiliates, or subsidiaries: Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo.  Payments began April 12, 2013. The procedure for reporting these payments varies, depending upon the circumstances. Following is a summary of several common

Lump Sum Base Payment

A limited number of borrowers will receive a check that includes only a lump sum “Base Payment” that is not broken down into individual amounts.  The letter enclosed will include a section called “Breakdown of your payment.” The tax treatment in all cases will depend on the taxpayer’s circumstances. A typical breakdown letter would state:

Section A:  Base Payment which may be reportable as income.

This is a lump sum payment that generally does not represent reimbursement of any particular amount.   If the amount in Section A is $600 or more, it will be reported to the individual on IRS Form 1099-Misc and shared with state agencies.  If the amount is less than $600, the individual will not receive information, but the full amount could still be taxable depending on the circumstances. 

Section B:  Return of the Mortgage Interest you paid.

This amount is the sum of mortgage interest previously paid by the borrower.  If the taxpayer took an itemized deduction for the mortgage interest amount, then the amount taxable would be the amount of the tax benefit the borrower received.   This amount will be reported on Form 1098. Amounts of less than $600 will not receive a statement, but the payment could still be taxable depending on the circumstances.  This amount will be reported to IRS and state agencies.

Section C: Returns of Equity on Your Home

This payment represents a return of the amount of the borrower’s lost equity in their home.   This amount will not be reported to the IRS or state agencies, but depending on the taxpayer’s circumstances it may be taxable.  

Section D: Interest on other payment components

This amount is interest earned on the amounts detailed in Sections A, B, and C and/or Section E below.  If the amount is $600 or more the amount will be reported on Form 1099-INT to the IRS and state agencies.  If the amount is less than $600 the amount will not be reported but the amount will still be subject to tax.

Section E: Return of Fees You Paid

This amount is a return of fees paid by the borrower against the loan. This amount is not being reported to IRS or state agencies, but the amount may still be taxable depending on the individual’s circumstances

Tax Withholding (Amount Subtracted from the Payment)

If the borrower did not provide Form W-9 as requested by the paying agent, backup withholding would be required.   This amount would be reported to IRS on Form 1099-Misc and or 1099-INT. A return must be filed to take credit for this withholding amount.

Revenue Ruling 2014-2 includes additional information needed to address this issue.