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Prof Porter on 2nd's being forgiven per the National Settlement
Dear Mr. McGoldrick,
At this point, I hope that you have gotten information but below is some detail that addresses your concern. To your primary point, these are NOT merely accounting charge-offs. The second lien is forgiven and a release is recorded.
Please feel free to post the text below to CDCBAA list serve and indicate that we have received questions about this and wanted to get information out to people. I've given the contact information for Angelica Ornelas, an attorney on my staff with bankruptcy expertise, if they have more questions. In fact, Angelica is joining CDCBAA and so will hopefully be a full participant on the list serve to watch if other questions related to the National Mortgage Settlement arise. She is copied on this message.
Katherine Porter
Professor of Law, UC Irvine
California Monitor, A Program of the Attorney General
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The nation's five largest mortgage servicers-Ally Financial, Bank of America, Citi Financial, JPMorgan Chase, and Wells Fargo-can receive credit towards their consumer relief obligations under the National Mortgage Settlement for reducing principal on loans they service, including second mortgages.
The Settlement only requires the servicers to perform second-lien modifications in two instances. First, a servicer must modify a second lien when it has modified a first lien via its proprietary modification process, including a Settlement modification, and another servicer that agreed to the Settlement owns the second lien. Second, a servicer must modify a second lien when another settling servicer has performed a first-lien modification.
The servicers can also perform second-lien modifications in addition to those required by the Settlement. For example, Bank of America implemented an extensive second-lien extinguishment program under the Settlement. Bank of America sends borrowers, including those who have filed chapter 7 or chapter 13 bankruptcy, a one-page letter informing them that their second lien will be extinguished. A homeowner who does not want the lien extinguished must contact Bank of America within 30 days. If the homeowner does not respond, the second lien is released and the associated debt forgiven. Given the opt-out structure, it is not surprising that participation rates in this program are extremely high. Bank of America reports these accounts to the credit bureaus as "paid in full" and "closed." This second-lien extinguishment program is unique to Bank of America.
Borrowers receiving second-lien forgiveness under the Settlement should consult with a qualified tax professional to discuss any potential tax consequences. These borrowers should also anticipate that their lenders will report any forgiven second-lien debt to the IRS using the appropriate 1099 form.
More information about the National Mortgage Settlement is available at the site of the California Monitor Program: www.californiamonitor.org. Questions specific to bankruptcy can be directed to California Monitor attorney, Angelica Ornelas, at aornelas@law.uci.edu.
Katherine Porter
Professor of Law, UC Irvine
California Monitor, A Program of the Attorney General
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