The Law Office of J. Patrick Sutton

You call this principal forgiveness?

Under the 2012 settlement between the federal government and 49 states, on the one hand, and the major home loan servicers, on the other, the big servicers agreed to give principal reductions to borrowers. How do they do it? Well, in the case of one of the biggest servicers, I reviewed a loan file where the servicer took past-due interest and other charges totaling tens of thousands of dollars, added it back into the loan as NEW principal, then "forgave" that "principal." The servicer then stated it was reporting the principal forgiveness to the IRS on behalf of the borrower since the principal forgiveness amounts to income for the borrower! A redacted copy of that document is HERE. An important point to note in this example is that the lender had previously added past-due interest and other charges into the loan, so this new modification was piling additional increments onto principal on top of what had already been added previously.
The Law Office of J. Patrick Sutton