Why are banks 'forgiving' debt that no longer exists?

Hand getting ready to erase the word

Outrageous.

That's the only way to describe what New York Times financial columnist Gretchen Morgenson says the banks are doing now.

Back in February, five of the biggest banks, including JPMorgan Chase and Bank of America, agreed to pay $26 billion to settle state and federal claims that they engaged in abusive foreclosure practices.

Basically, they used improperly prepared and reviewed documents (what was commonly referred to as the “robo-signing” scandal) to throw people out of their homes.

In that settlement, the banks agreed to help borrowers who are in trouble by forgiving some of what they owe on their mortgages, with that amount being credited toward the $26 billion the banks owed from the settlement.

In a column published this week, Morgenson says borrowers who have already erased second mortgages, usually through bankruptcy filings, are getting letters from banks forgiving them for liabilities that no longer exist.

She asks whether these forgiveness letters are "a way to gain credits for debts these institutions are improperly claiming to have extinguished."

I'm guessing it is.

Who would be surprised to find these letters are part of a scheme by the banks to claim credit for home equity loans that were written off prior to the settlement?

I’m beginning to wonder if the state and federal officials who negotiated this deal were just naïve to expect the banks would honor their commitment to help underwater homeowners and give the housing market a boost.

Morgenson uses Jackie Esposito and her husband as an example.

They filed for bankruptcy in 2009, which legally erased their lien, but they just recently received a letter from Chase relieving them of their debt burden.

“You can’t forgive a debt that you’re legally unable to collect,” points out Ms. Esposito.

She currently pays 9% on her first mortgage and can't refinance into a lower rate due to her bankruptcy.

Chase won't help her modify her current loan, she says, but they have no problem forgiving an already discharged loan and releasing a nonexistent lien.

These letters may also create tremendous tax problems for the homeowners who receive them.

The IRS considers any debts forgiven outside bankruptcy court to be taxable income.

And the letters from banks indicate that the forgiveness will be reported to the IRS.

That $26 billion is supposed to be mortgage relief for borrowers, but it sounds like banks are doing anything but helping homeowners.

“There is no chance that this group of institutions can help homeowners,” Neil Crane, a lawyer for Ms. Esposito in Connecticut told Morgenson. “They should not be in charge of fixing problems they helped create.”

I couldn't agree more.

If you want to use your first of 10 free stories for the month from the New York Times, this is a great one from Morgenson. You can find it here: http://www.nytimes.com/2012/09/30/business/when-banks-erase-a-debt-that-isnt-there.html?_r=0