Bank of America’s big move
As part of what Bank of America calls their “ongoing efforts to help customers in need of mortgage assistance,” roughly 150,000 letters are currently being sent to pre-qualified homeowners that offers to automatically extinguish the full, unpaid balance of their second lien mortgages. Bank of America said in a statement, “The intention of the program is to place homeowners in an improved financial situation by reducing their monthly debt obligations and, potentially, help them create equity in their property.”
This big move is part of the terms of $25 billion mortgage servicing settlement reached this spring after years of investigation of the nation’s largest mortgage servicers in a joint effort between federal, state, and local entities.
Details of the second-lien forgiveness
Homeowners cannot request to be a part of this program, as the bank has already pre-approved the second liens they will consider. Bank of America says that most of the letters that will go out by the end of the year are delinquent, and many are on a property that is also delinquent on their first lien mortgage. Bank of America notes that this second lien relief program is completely separate from any actions being taken on the first mortgage. “If the first mortgage is in foreclosure, those foreclosure activities may continue,” the company said.
Homeowners who receive a pre-approval letter will have their second lien debt automatically forgiven unless they opt out of the relief offer within 30 days, which is unlikely in most cases.
The impact on homeowners’ taxes and credit scores
Bank of America reminds homeowners that their company is required to report the amount of the eliminated second lien mortgage debt to the Internal Revenue Service. Current federal law provides for certain exceptions to tax liability when debt is forgiven in connection with a foreclosure prevention transaction for some customers; however, debt elimination may trigger state and federal income tax liabilities for customers.
Additionally, the banks says that “Through the extinguishment program, we will report to the major credit bureaus that the customer’s second lien mortgage is now “paid and closed” and has a zero balance, which could affect a customer’s credit rating.”