Mortgage Forgiveness Debt Relief Act – Let’s Extend It

Mortgage Forgiveness Debt Relief Act – Let’s Extend It

Photo by ddpavumba from
Photo by ddpavumba from

The Mortgage Forgiveness Debt Relief Act provided relief for distressed homeowners by eliminating the tax on debt forgiven during distressed real estate transactions.  When a homeowner was in distressed, could no longer afford their homes and found that their homes were worth less than what was owed, they could attempt to get the lender to forgive a portion of their loan so they could sell their home.  When this happens, the forgiven debt becomes taxable income.  The Mortgage Forgiveness Debt Relief Act expired and now homeowners are now back on the hook to pay taxes on phantom income when they are already in a distressed situation.

The U.S. Senate has introduced two bipartisan pieces of legislation that would extend the Mortgage Forgiveness Debt Relief Act through 2016.

But the US homes market has recovered . . . not quite.

Prices have stabilized and many homeowners refinanced their homes through the Home Affordable Modification Program (HAMP).  This program allowed homeowners a way to refinance their homes to payments that they could afford to avoid foreclosure.  However the redefault rate on this program is staggering.

The Treasury Department Reports that as of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarter of 2009, are redefaulting at a rate of 46.1 percent and 39.1 percent. HAMP permanent modifications from 2010 also had high redefault rates, ranging from 28.9 percent to 37.6 percent.  These people clearly can’t afford their homes, but they can’t afford the tax consequences of a short sale.

So we get another round of foreclosures . . . and the cycle continues.

However banks are getting a bit smarter and rather than foreclosing, they are kicking the can down the road by selling this defaulted debt to hedge funds who further sell to note investors.  Both the hedge funds and note investors, because they are purchasing this defaulted debt at a discount are in a much better position to help the home owner beyond what the original lender could.  Allowing the new note owner to complete a short sale or take a short pay off or modify the loan much faster and easier than the original lender.  But if the home owner opts for a short sale to sell the home or to make a lump sum payment to the new owner of their loan, they are facing tax on that forgiven debt, unless the act is extended.

Acts now in Congress

According to all of these bills have a 0 t0 1% chance of passing.  If you believe this act should be extended you can click on the bill links above to share your thoughts with congress.

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