Bank of America will erase 150,000 second mortgages
Bank of America is sending some great news to about 150,000 of its customers who are having a hard time paying their second mortgages: a letter freeing them of their debt.
If you don’t get a letter via certified mail or Federal Express, you aren’t eligible for the special deal, and there’s no way to volunteer for the program, according to the bank.
The bank is forgiving the loans — typically home equity loans or lines of credit — of a select group of customers, most of whom owe more on their combined first and second loans than their homes are worth and who failed to make payments on a second home loan the bank owns.
The offer is part of the $26 billion mortgage settlement in the foreclosure robo-signing scandal, a deal negotiated between 49 state attorneys general and five big mortgage servicers.
The size of the forgiven debt could be significant based on prior BofA actions.
Between March and the end of June 2012, BofA forgave 769 second loans averaging $70,410 for a total of about $54 million in relief, according to the monitor for the national settlement.
BofA started sending the letters in July and will continue contacting its customers through December.
BofA also said it plans to continue pursuing foreclosures against homeowners who do not make payments on their first mortgage after their second mortgage is erased.
Watch out for tax implications
If your lender forgives your second loan, it’s important to consider the tax consequences. If your debt is forgiven by Dec. 31, 2012, you might not owe federal taxes for the transaction.
But starting Jan. 1, 2013, up to $2 million in mortgage debt that’s forgiven via a deal like this one, a short sale or even a mortgage modification, would be counted as income by the IRS and therefore subject to income tax at whatever tax bracket you’re in.
That’s because an exemption from having to pay tax on what the IRS calls “forgiven debt” is set to expire at the end of 2012 unless Congress acts.
You’ll also want to check your state’s rules to see if you’d owe any income tax at the state level. Those rules can be complicated.
For instance, California taxes forgiven debt differently when you refinance your home to buy something (like a car) than when you refinance to pay for home improvements.
If you don’t get a letter, but you’d like to ask BofA for help with your second mortgage, call 800-669-6607.