Mortgage Forgiveness Debt Relief Stuck On Capitol Hill

Congress at workIf you’re wondering why the impact of the foreclosure crisis lingers on you might want to consider what’s happening on Capitol Hill.

In 2007, in a fit of common sense, Congress passed the Mortgage Forgiveness Debt Relief Act. This was an important piece of legislation because it corrected an obvious wrong. Let me explain:

Traditionally, if you didn’t repay your mortgage, the unpaid amount was treated as “imputed” income. In other words, if you had a $150,000, lost your job, faced foreclosure and could only pay back $115,000 through the sale of the property or a foreclosure auction, then the unpaid balance — $35,000 in this case — was regarded as taxable income.

You can instantly see what’s wrong with this situation: The government was going to chase down homeless people for taxes for fictional money they did not receive. The theory makes sense but the reality is absurd. If our homeless taxpayer had $35,000 or anything close he or she would not have been foreclosed.

Mortgage Forgiveness Debt Relief

But there is another problem here which is hardly mentioned: If you’re a lender you don’t want borrowers facing hard times to drag out foreclosure actions. It’s cheaper and easier to have an accommodation so that while no one is a winner at least everyone loses less.

In 2007, facing an historic wave of foreclosures, Congress passed the Mortgage Forgiveness Debt Relief Act. Basically, for most residential owners, there would no longer be a tax on imputed mortgage debt — at least until December 31, 2012 when the rule would expire.

By 2012 it was fairly obvious that the rule was still needed so it was extended until December 31, 2013. Now, at this writing, the rule is dead, it has not been extended, and so people facing hard times now have very little incentive to do anything but fight lenders, fights which will cost lenders billions in lost principal and interest.

To make matters worse, you can pretty much bet that people facing foreclosure and with no money have little incentive to fix up their homes. And, you can also pretty much bet that when the lender eventually gets title the value of the property will be in the dumper. The result is that local real estate values will once again see an upsurge in discounted home sales, sales which knock down neighborhood home values and property tax collections.

Mortgage Debt Forgiveness Relief In Washington

There is now some effort in Washington to re-establish debt relief but a big stumbling block is that idea that the Feds will collect $5.4 billion in new revenues over two years if debt relief legislation is not restored. This is delusional because it does not consider the vastly-larger sums which are being lost by neighboring home owners and state tax collectors. Moreover, the idea that the federal government will collect $5.4 billion from homeless people is absurd while the lawful chase for such money is simply immoral.

The Senate Finance Committee has now passed legislation to reinstate mortgage debt forgiveness. Such legislation needs to be enacted by the Senate and then acted on by the House. Most probably nothing will happen because people losing their homes do not have lobbyists or PAC money, the main engines of change in Washington. To its credit, the National Association of Realtors and the Mortgage Bankers Association, among others, are fighting to reinstate the legislation. Good for them, this is one case where interests are aligned in a way where the public will actually benefit.

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