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Posted by on Jul 11, 2012 in Principal Reductions | 16 comments | Print Print

Free Cheese Not Eaten

Hat tip to SM for sending this along from

When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.

Homeowners who fell behind on their payments began receiving the mailings in May, part of the bank’s effort to meet terms of the $25 billion industry settlement over foreclosure abuses. More than half haven’t responded as “borrower fatigue” causes them to tune out the offers, said Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank.

“The number of customers responding is lower than we expected, given the significant assistance available,” Frahm said in an interview. “We are working very hard to determine why response rates are lower than expectations.”

Bank of America, which pledged almost half of the fines and assistance in the February settlement with state and federal officials, is critical to determining how many U.S. homeowners are helped by the landmark deal. Housing advocates say that relying on the same companies that committed loan servicing abuses to avert foreclosures may result in yet another program that helps fewer people than intended.


  1. Perhaps non-payers aren’t interested in principle reduction because they have no intention of ever making another payment.

  2. Probably thought it was just another unpleasant notice of something so they threw the envelope in the recycling bin without opening it.

  3. I’d guess a mix of both above?

    When daily mail goes away, will realtors pay fedex to deliver their 18,000 mailers every month?

  4. “Perhaps non-payers aren’t interested in principle reduction because they have no intention of ever making another payment.”

    Ya. It’s a principal reduction, not a payment reduction, and the non-payers really don’t care about the principal.

    The payment is already zero – hard to improve on that.

  5. As Homer Simpson once said after wiring up his house with free cable:

    “Zero dollars a month. I think I can afford that !”

  6. it sure is nice that the people who dont pay their bills are getting all the offers.

    No wonder so many people have quit paying. get a few years free rent and then buy another home.

  7. A while back I received an offer from C for principal reduction despite no late pays and being a couple months from full payoff. They called it a “short refi”. Suggest any paying underwaters call their servicer and ask for free cheese.

  8. Not surprising; less than half of all Carlsbad residents responded to their choice for new WM dumpsters recently.

  9. More than likely,these letters are going to the same people who BOA played “modification waterboarding” with before denying their HAMP mod. NO ONE who has gone through that process of 7-8 account managers and lost docs repeatedly would believe that this NEW offer was real-even when they HAD a REAL hardship like death of a spouse. How anyone could trust their money to a Bank who LOSES so much paperwork amazes me.

  10. Probably thought it was just another ad-scam “junk mail” that fills all of our mailboxes…

    Why doesn’t the Bank move to slice off the $150,000 anyway automatically if they are offering more “free money”?

  11. It would be interesting to see what one of these letters actually says.

    And the cheese does not necessarily come at no cost. When you get a principal reduction as part of retaining a property, you get 1099’d for the cancellation of indebtedness as income. Probably the only exception that would apply is if you are insolvent. There may indeed be rational reasons to say “no thanks”.

  12. Not to mention switching from purchase money to refi makes you “recourse”.

  13. “More than half haven’t responded as “borrower fatigue” causes them to tune out the offers, said Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank.”

    More likely Bank and Government fraud fatigue Now Starring ‘The LIEbore Chronicles’ and a Fear & Loathing of the disgusting and dispicable Presidential Reality Show.

  14. Couple of things re posts 11 & 12:

    While you are likely to get 1099’d for principal forgiveness (as well as a short sale or foreclosure resulting in a debt write-down), if you have a non-recourse loan(s) box 5 on the 1099 should not be checked as you are not personally liable for the debt. Being personally liable for the debt is one pre-requisite to getting taxed on the forgiven amount. With non-recourse loans, there is no personal liability and therefore you will not be taxed by the IRS on the amount forgiven.

    In addidtion, the Mortgage Debt Forgiveness Relief Act is still operative through 2012 and results in no taxation on forgiveness of recourse debt if certain pre-requisites exist. This Act is free-standing of the IRS provisions regarding no taxation of non-recourse loan forgiveness. This Act is likely to be extended.

    The insolvency exception is also free-standing and will get many off the hook re taxation. So there are multiple layers of tax code provisions working in favor of the debtor.

    Re re-financing purchase money loans, I have not looked at this issue within the past 12 months but the last time I looked there was case law that suggested that a re-fi of purchase money with no money out would not re-characterize the debt as recourse. It’s a developing area, however, and anyone who is looking to take advantage of a principal reduction “re-fi” should in all communications with the lender refer to the deal as a “loan mod” and as part of the deal try to get a provision in there that states that it’s just a mod of the purchase money loan, not a new loan, and that the debt is still non-recourse.

  15. dacounsalor:

    To your first point… that’s not what the IRS has to say about it, and while it looks like you have copy/pasted your post, it is somewhat misleading. You might want to be careful about giving tax advice:

    Look at slide 4:

    Discharge of nonrecourse debt in a loan modification: CODI can arise. See Revenue Ruling 91-31; Revenue Ruling 92-99.

    However, I agree about your second point. Until 2012 is over, CODI (cancellation of debt income) is nontaxable. (see slide 8-9).

    Taxpayers should review IRS guidelines for possible Form 982 uses.

    Basically, NonRecourse IS cancellation of debt income. It can be excluded using form 982 through 12/31/2012, but EVERYONE please consult a qualified tax professional to understand how this might impact other AGI calculations or taxation to other income.

    Just cause the interwebs says it’s true, doesn’t mean it is.


  16. Thanks Chuck, I just re-read last years email from my CPA on the issue and he says ‘principal reduction modifications with property retention are not treated the same as short sales and foreclosures’ – I missed the ‘not’ in my translation, a little word with a big meaning.

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