by Broderick Perkins
(10/3/2012) - The holiday gift-giving season is coming early for some 150,000 Bank of America customers about to see their second mortgage go "poof!" and, perhaps, enjoy a boost to their credit standing in the process.
For those who qualify, it's a little like hitting the lottery.
Unfortunately, for too many, as is too often the case under most private or federal relief programs, if you are struggling, but current on your first and second mortgage, don't expect to benefit from this program.
The nation's largest bank recently announced it's notifying 150,000 pre-qualified customers of an "automatic extinguishment of their second lien mortgage" as part of BofA's participation in the $25 billion National Mortgage Settlement.
The national settlement addresses an institutionalized culture of foreclosure abuse and sets forth requirements for banks named in the settlement to provide billions of their own funds for loan modifications, principal reductions, refinancings and other relief.
The national settlement also comes with new mortgage servicing regulations designed to prevent future foreclosure abuse. It's effectiveness has been questionable.
Credit, tax impact
BofA says it will report the erased second mortgage amount as "paid and closed and has (customer) a zero (second mortgage) balance" to credit bureaus and that could have a positive effect on some credit reports. However, BofA only says the action "could affect a customer's credit rating," without indicating if the effect could be negative or positive, while pointing to the Federal Trade Commission's website at "Need Credit or Insurance? Your Credit Score Helps Determine What You'll Pay," for more information.
Because the erased amount could be considered taxable income, BofA says it "may be required" to report the amount to the Internal Revenue Service and that comes with the potential for taxes due on the amount.
Current federal law, the Mortgage Debt Relief Act, exempts forgiven debt from taxation under certain circumstances involving hardship, declines in home values and other conditions.
The federal law expires Dec. 31, 2012 and state laws may vary. BofA customers, who get an offer from BofA to make their second mortgage disappear, should contact a tax or financial professional to determine how the move could affect their tax liability.
If you don't get a letter, don't bother contacting BofA. Eligible homeowners have already been selected and will receive Federal Express or certified mail, explaining the offer. Mailings began in late July.
Once again, it appears that struggling homeowners who've managed to keep up on payments drew the short straw. BofA said the vast majority of the second lien mortgages eligible for this program are in default.
If your first mortgage is in foreclosure, foreclosure could continue. The disappearing second mortgage deal does not impact the first mortgage.
In addition to the national settlement's mandate to provide relief to homeowners, BofA says it's making the move to help struggling homeowners avoid foreclosure by reducing their monthly mortgage outlay and to help them regain some home equity or begin to rebuild it faster and sustain their homeownership.
Earlier this year, under National Mortgage Settlement provisions, BofA announced a principal reduction program offering reductions of tens of thousands of dollars - some reports say as much as $150,000 - but, again, only to those who are at least 60 days behind on payments.
The bank invites customers who need mortgage help to call 1.800.669.6607 or visit its loan assistance programs web page.
In addition to providing little relief for underwater or struggling homeowners who've managed not to miss payments, BofA is also under the gun for a discrimination complaint recently filed by the National Fair Housing Alliance's (NFHA).
NFHA's complaint with the U.S. Department of Housing and Urban Development (HUD) cites incidents that allege the bank takes better care of REOs (real estate owned or repossessed properties) in white neighborhoods than REOs in minority neighborhoods.
Other related articles: