Though I’m not sure anyone pays attention to them anymore, the President delivered his weekly address this weekend, and it was all about how Congress has to help “responsible” homeowners (because the irresponsible ones deserve nothing, after all they fleeced those responsible banks to get the loan). In the address, President Obama contrasted his approach with a Congress that won’t expand refinancing for underwater borrowers, by saying that his Administration “teamed up with state attorneys general to investigate the terrible way many homeowners were treated, and secured a settlement from the nation’s biggest banks – banks that were bailed out with taxpayer dollars – to help families stay in their homes.”

So what about that? We know from early reports that the bulk of the consumer relief in the first three months of the foreclosure fraud settlement went to short sales, which involve families forced into SELLING their homes, not staying in them. The bulk of these short sales, which amount to a bank waiving the right to seek money from a homeowner who sells a home for less than they owe on their mortgage, occurred in states whose laws bar banks from going after those homeowners anyway. Other aspects of the settlement are largely incomplete at the moment.

Nevertheless, I have seen a number of letters received by families with congratulatory statements like “You are approved for a full principal forgiveness of your account.” There are lots of these in the pipeline, the big banks say, and they’re just in the process of getting out the door.

There’s just one thing about that: the same servicers who bollixed their response to a crush of loan modification requests are the ones doing the forgiving of principal. So they predictably make mistakes. Only in this case, it’s less a mistake than an example of how easy the banks have gotten off with this settlement.

Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out [...]

Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.

It’s bad enough that these letters are inaccurate. But even worse are the tax problems that they may create for people like Ms. Esposito. In most cases, the Internal Revenue Service considers debt that is forgiven to be taxable income. One exception occurs in bankruptcy; when a debt is discharged, it is not taxable.

But the letters sent by Chase and Bank of America clearly warn that the forgiveness will be reported to the I.R.S. If so, these borrowers may have to prove that the banks erred in claiming to have forgiven the debts.

This refers the principal reduction tax nightmare that I’ve written about repeatedly.

Gretchen Morgenson, inquiring with banks as to why they sent letters discharging debt that homeowners no longer owed, found that the bank often still holds liens against their properties, regardless of the prior debt forgiveness. And this is what they claim to be giving up. Bank of America said they did this in 12,000 similar cases. The banks also swear up and down that, just because they’re releasing an effectively defunct lien, that they won’t try to submit these cases for credit under the mortgage settlement. But then why send the letter? And why send a letter that looks EXACTLY THE SAME as the letters announcing principal forgiveness on active loans?

Waiver of deficiency judgment is eligible as a credit under the settlement, and that’s relatively similar to this scenario. Joseph Smith, the foreclosure fraud settlement monitor, claims his office will “review compliance” of the loans and make the determination on qualification for credits. So he’s going to go through the documentation, then? But this is the whole point; the documentation is bogus!

I don’t think it’s possible that banks are just nicely announcing the discharge of a lien with no expectation that they can slide some of these through the system and get credit for a loan forgiveness. Otherwise, why send the letters now, in conjunction with the settlement? And BofA admits to sending 12,000 of them. Even a small percentage getting through means they get settlement credit for millions, perhaps tens of millions, of dollars of phantom debt that they could never collect anyway.

The banks have so many options to reduce their exposure in this settlement, it’s impossible for the settlement monitor to stay on top of them all.