In 2007, President G.W. Bush signed the Mortgage Forgiveness Debt Relief
Act into law. The Act exempts forgiven mortgage debt as the result of
a foreclosure, loan modification, short sale, etc. Most people aren't
aware that the IRS considers forgiven debt to be taxable income. Had the
Act not been signed, millions of distressed homeowners would have lost
their homes and been taxed for the privilege.
The Act is set to expire at the end of this year. There are currently two
resolutions pending in the U.S. House and one bill pending in the U.S.
Senate, but the lame duck session of Congress is rapidly approaching its
end. I have personally seen this issue being reported by three sources,
and it's not receiving any coverage in national news media.
Dennis Rodkin of Chicago Magazine has written about this topic. So has
David Dayden at Firedoglake. He links to a
Huffington Post article, which rounds out the three.
Allowing the Act to expire at the end of the year would cause several immediate problems:
1. The short sale market would take a major hit. Short sales don't
always guarantee that the bank will forgive the "short" amount
owed, but this can be negotiated. If homeowners sell short and then also
take a major tax hit due to the forgiven short amount, there is a major
disincentive to attempt a short sale.
2. Principal reductions on loan modifications become a terrible idea. Through
the end of this calendar year, a hefty principal reduction is one way
to get a delinquent mortgage back on track. Not only does it help make
payments more affordable, it also helps homeowners build some equity.
If the Act is not extended, those principal reductions become taxable
income, which is a major burden to a struggling homeowner's budget.
3. The already anemic National Mortgage Settlement would be gutted. Since
the National Mortgage Settlement relies upon short sales and principal
reductions, failing to extend the Act would turn relief under the settlement
into a massive burden on homeowners.
Congress and the President are currently facing off regarding the fiscal
cliff. The current legislative sessions for the House and Senate are slated
to end on December 14 (with the Senate's actual end date TBA). The
legislation that would extend the Act's tax exemptions may very well
go unaddressed. If you're concerned about the issue, then
contact your Congressperson and Senator.